Highlights/ Comments

• DRB share price has recently come under pressure amidst ongoing negative market news flow on the disappointing Proton sales volume as well as the withdrawal of tenders of prospective Foreign Strategic Partner (FSP).

• We believe the successful selection of FSP by mid-2017 will come into realization, as the survival of Proton is the main priority by all stakeholders (government, DRB, suppliers, staff etc.). Without FSP, Proton may worsen financially (cash draining) and eventually face winding up. One of the conditions set by government in injecting RM1.5bn to Proton (2016) was to seek and identify a “strategic and renowned partner who will assist in R&D for Proton to become a competitive player in auto industry at the international level”.

• Both government and DRB have issued statements that all the FSP bidders (from several parties) are still in the running and DRB is in the midst of evaluation stage to select the best FSP, which will be finalized by May 2017.

• Excluding Proton’s losses, DRB group would be making profits for the past financial years. We expect re-rating for DRB post the exercise, given the de-consolidation of Proton from DRB’s financial, which will allow investors to appreciate DRB’s core earnings from other divisions.

Risks

• Prolonged tightened lending rules; Slowdown of the Malaysia economy affecting car sales; Global automotive supply chain disruption; Slow integration of Proton and Pos.

Forecasts

• Unchanged.

Rating

BUY ↔

• With the potential M&A exercise for Proton (emergence of strategic foreign shareholder) on the card, we can expect re rating catalyst on DRB’s valuation. DRB is expected to make the final decision by mid-2017.

Valuation

• We maintain BUY recommendation with higher Target Price of RM2.22 (from RM2.00) based on 20% discount to SOP, following the upgrade in our PosM valuation from RM3.36 to RM4.80. DRB also benefits from PosM re-rating, following its consolidation of KLAS (Pos Aviation) and collaboration with Alibaba.

Source: Hong Leong Investment Bank Research - 6 Apr 2017