DRB has proposed to dispose 97.37% owned AFSB for RM944.6m, as part of its on-going group restructuring plan and unlock valuation in AFSB. The exercise is expected to complete in 1QFY2019 and DRB will recognise gain on disposal of RM735.4m. We are positive on the disposal exercise, which is higher than our assumed value of RM665.9m and further improves DRB’s cash-flow. Maintain BUY with higher TP: RM2.62 (from RM2.50).

NEWSBREAK

DRB-Hicom (DRB) has proposed to dispose its 97.37% stake in Alam Flora (AFSB) to Malakoff for a cash consideration of RM944.6m. The exercise is expected to complete in 1QCY2019 and DRB will recognise a net disposal gain of RM735.4m. The cash proceeds will be used for debt repayment (RM500m) and investment in existing and future businesses (RM444.6m).

Alam Flora. The principal activities of AFSB are the provision of integrated solid waste collection and public cleansing management services. It was awarded a 22 year concession (Sep 2022 to Aug 2033) for the provision of collection and public cleansing management services in Pahang, Kuala Lumpur and Putrajaya. It is also looking to expand its concession area into Kelantan and Terengganu.

Rationale. The proposed disposal exercise provides an opportunity for DRB to unlock the value and monetise its investment in AFSB and to pare down Holding co debt, while providing funds for potential capital injection into 50.1% owned Proton, which is currently undergoing turnaround restructuring exercise.

Earnings impact. For FY03/16-18, AFSB recorded revenue of RM727.3-RM813.0m and net profit of RM93.6-RM107.7m.

HLIB’s VIEW

Positive. We are positive on the disposal exercise, as part of DRB’s ongoing restructuring exercise to have a leaner and more focused organization structure. The disposal exercise will improve its immediate cash-flow and funding requirements.

Valuation. The cash consideration of RM944.6m is higher than HLIB’s assigned conservative value of RM665.9m and book value of RM283.3m (as at 31 Mar 2018).

Forecast. Unchanged pending completion of the exercise in 1QCY2019.

Maintain BUY, TP: RM2.62. We maintain BUY recommendation on DRB with higher TP: RM2.62 (from RM2.50) after imputing higher valuation for AFSB. We remain positive on Geely’s commitment in turning around Proton and establish Proton as its platform for regional ASEAN market expansion.

Source: Hong Leong Investment Bank Research - 2 Aug 2018