News

• DRB has entered into a non-binding term sheet (with Lum Chang Holdings Singapore) to dispose its subsidiary Corwin (90% ownership), which owns The Verge in Singapore (an 8 level shopping mall). The term sheet allows Lum Chang to commence due diligence works on Corwin and commence negotiations with DRB exclusively within 4 weeks interval. At the moment, no value has been ascertained yet.

• Based on Corwin’s audited account FY03/15, Corwin made a profit of SG$0.03m and had net book value of SGD140m while its net assets (Nov 2015) was SG$56.1m.

Comments

• We are positive on disposal, as part of DRB’s rationalization plan in disposing non-core assets to improve its balance sheet and realize its investments gain.

• This is DRB’s second attempt on disposing Corwin. The first attempt was back in Dec 2015 for a cash consideration of SG$317m, which would be reduced to SG$210.1m (after deducting SG$21.4m disposal expenses and SG$85.5m borrowings). Net proceed to DRB was expected at SG$189.1m.

• We expect the current valuation of Corwin to be somewhat similar or slightly lower than the previous valuation finalized under the first disposal attempt (back in Dec 2015).

• DRB needs to recapitalize its cash position, given the ongoing financial pressures from (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 Malaysia 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

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) Weakened MYR; and 4) Intense competition from rival automotive marques.

Valuation

Maintained HOLD on DRB with unchanged Target Price of RM0.85 based on 30% discounts to SOP.

Source: Hong Leong Investment Bank Research - 4 Aug 2016