News

• DRB has proposed to dispose its wholly owned subsidiary KLAS for RM749.35m (vs. HLIB’s valuation of RM412.2m) and 9.912 acres of land in Pekan HICOM for RM69.0m (potentially subject to GST which will be borne by POSM) to 32.2% owned associate Pos Malaysia (POS). The disposal price has taken into consideration of the capitalization of RM464.7m dues from KLAS to DRB.

• Note that lower disposal price of RM818.35m (vs. original amount of 835.16m) and loans amount of RM464.7m (vs. original amount of RM552.9m) was partly due to the completion of 100 acres land near Northern Gateway novated from KLB (subsidiary of KLAS) to DRB for RM65.34m back in February 2016.

• The total disposal consideration of RM818.35m will be satisfied via the issuance of 245.75 shares by POS at RM3.33/share (despite current share price of RM2.13, which translates into total consideration of RM523.45m). DRB will seek for exemption from Securities Commission Malaysia from undertaking Mandatory Take-Over Offer on POS post the disposal exercise.

• The proposal is subject to the approval of: 1) DRB shareholders; 2) POS shareholders; 3) Securities Commission; 4) Bursa Malaysia; 5) Ministry of Finance; and 6) Malaysia Communications and Multimedia Commission.

Comments

• We are positive on the strategic proposals, which will further streamline its logistic businesses (POS, KLAS and KLB) under 32.21% associate POS Malaysia (which will become 53.49% subsidiary once the proposal completed) and improve the synergies within DRB group.

• Furthermore, POS has strong net cash holding of RM500m (as at end Dec 2015), which can be injected into KLAS and KLB for the required capex for development and expansion, and relieve DRB’s capital commitment on these businesses.

• Based on audited FY03/15, KLAS recorded net profit of RM8.3m and net assets of RM167.2m. DRB is expected to record re-measurement losses of RM338.4m and transaction costs of RM13.9m from the exercise.

Risks

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

Forecasts

• Unchanged, pending completion of the exercise by 2QFY07.

Rating

HOLD

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 HOLD on DRB with unchanged Target Price of RM1.05 based on 35% discounts to SOP.

Source: Hong Leong Investment Bank Research - 16 Mar 2016