News

• DRB has entered into a share sale agreement to dispose its subsidiary Corwin (90% ownership), which owns The Verge in Singapore (an 8 level shopping mall) for cash consideration of SG$317m (SG$285.3m attributed to DRB).

• Based on Corwin’s latest audited account FY03/15, Corwin made a profit of SG$0.03m and had net book value of SGD140m. Its unaudited account ended Nov 2015 revealed the net assets at SG$56.1m. We note the disposal is at a high valuation of >10k x P/E, 2.3x P/B and 5.6x P/Net Assets. DRB’s total investment into Corwin was SG$224.9m.

• The net proceeds will be SG$210.1m (after deducting SG$21.4m disposal expenses and SG$85.5m borrowings), and DRB will receive 90% of the proceeds i.e. SG$189.1m (RM578.3m).

• The Proposed Disposal will allow DRB to unlock the value of its investment in Corwin based on the current market value of the property and strengthened SG$ (vs RM). DRB is expected to recognize a disposal gain of RM427.5m or 22.1sen/share.

• The disposal exercise is expected to be completed by 1Q16.

Comments

• We are positive on disposal, as part of DRB’s rationalization plan to improve its balance sheet. The net gearing ratio of DRB will improve from 0.91x (based on FY03/15) to 0.83x.

• DRB has been facing financial pressures due to (i) continued huge investment into Proton and Lotus; and (ii) underperformance of the automotive segment, hit by declining sales volume and margin erosion on stiff competitions and weaker RM against major foreign currencies.

Risks

• Prolonged bank tightening measures on lending rules.
• Slowdown of the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

• Unchanged. Earnings impact would be immaterial given Verge’s small profits of SG$30.5k (RM91.5k) for FY03/15.

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

Valuation

• Maintained Buy on DRB with unchanged Target Price of RM1.60 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 22 Dec 2015