Highlights/ Comments

• DRB’s subsidiary CTRM has entered into agreements with UTAS, to vary certain terms and conditions of the parties’ existing contract agreements due to changes in market conditions since existing agreements in 2008 and 2009.

• The existing agreements and new contract amendments are related to the supply of various parts and components (such as fan cowl, thrust reverser etc) for the use in commercial aerospace industry.

• Contract amendments:- 1) Extend the term of the existing agreements to align with the contract period between UTAS and its customers (“UTAS own contract period”); and 2) Revise pricing for the supply of parts and components due to changes to market conditions and product requirements.

• The amendments are expected to contribute an average additional RM218m revenue per annum to CTRM (DRB) for the next 15 years.

• We are positive on the contract amendments, which will contribute positively to DRB’s bottomline. We understand that CTRM has a PBT margin of 6-10% for existing contracts. We believe the additional revenue contribution is meant to protect CTRM’s net margin (given the increased input cost structure) and business sustainability.

• Note that CTRM was incurring losses when DRB took over in 2013 from MOF for RM298m. DRB has successfully turnaround CTRM in 2014-2015 with contribution of RM30m (4.4% margin) to DRB’s PBT of RM488m (RM208m excluding EIs) in FY03/15 and targeted to contribute RM50m for FY03/16.

Risks

• Slowdown in the Malaysian economy.
• Global automotive supply chain disruption.
• Sudden jump in fuel prices and interest rate.
• Depreciation in RM.

Forecasts

• Unchanged pending further information on the amendments.

Rating

BUY

Positives

• 1) Restructuring of Proton and Lotus; 2) Partnering VW group to set up regional hub in Malaysia; 3) Honda Malaysia to set up regional hub for Hybrid car; 4) Deftech’s MoD contract of RM7.55bn over 7 years; and 5) Synergy of POS with DRB’s other business units.

Negatives

• 1) Banks tighten financing rules; 2) Weakened consumer sentiment; 3) Weakening of MYR; and 4) Intense competition from rival automotive marques.

Valuation

• Maintained BUY recommendation with unchanged Target Price of RM1.72.

Source: Hong Leong Investment Bank Research - 8 Oct 2015