News  In an announcement to Bursa Malaysia, DRB-HICOM (DRBHICOM) announced that its wholly-owned subsidiary company, KL Airport Services Sdn Bhd (KLAS), has entered into a share sale and purchase agreement with Bendahara 1 Sdn Bhd (Bendahara) to acquire Bendahara’s 61.61% stake in Konsortium Logistik Berhad (KLB) for RM241.0m cash or RM1.55/KLB share.

 The offer price of RM1.55 per share is 2.6% and 94% higher than KLB’s last traded price of RM1.51 and net asset value of RM0.80 per share as of 30 June 2013, respectively.

 As a consequence to the acquisition which triggers a Mandatory General Offer (MGO), KLAS and its parties acting in concert will be obligated to extend a MGO to buy the remaining 29.4% KLB Shares that they do not own at RM1.55 per share totalling RM150.1m.

 Including MGO, the total acquisition is RM391.1m (RM432.6m including enterprise value).

 The acquisition is expected to be completed by 1Q 2014.

 Bendahara is wholly-owned by E-Cap (Internal) One Sdn Bhd, which is in turn wholly-owned by Ekuinas Capital Sdn Bhd (ECSB). ECSB is a wholly-owned subsidiary of Yayasan Ekuiti Nasional (YEN) which also has 100% equity interest in Ekuiti Nasional Berhad (Ekuinas).

Comments  We are neutral on this latest news by DRB-HICOM. The acquisition allows DRB-HICOM to develop KLAS into a leading centralised integrated logistics services provider in Malaysia by providing a one-stop integrated suite of logistics solutioncovering air, sea and land transportation solution that includes linking up warehousing, distribution and supply-chain management. However, this acquisition appears expensive although synergistic.

 For illustrative purposes (impact to financials) : (i) based on the total acquisition cost of RM391.1m (including MGO), the acquisition works out to 33.7x annualized 1H13 core net profit of RM5.8m (market consensus is unavailable as the stock is not tracked by analysts) and 1.9x KLB book value as at 30 June 2013, (ii) assuming the acquisition is financed entirely by borrowings and inclusive of KLB’s net debt of RM41.6m (as at 30 June 2013), DRBHicom’s net debt and net gearing is expected to rise from RM3.6b to RM4.0b and 0.57x to 0.64x as at 30 June 2013, respectively, and (iii) potential impairment from goodwill arising from this acquisition since it is priced above NTA.

 Excluding this impairment if any, earnings enhancement to DRB is minimal over the next twelve months.

 On a P/BV basis, this acquisition appears expensive compared to what Bendahara paid back in 2012. Recall, the previous transacted price back in year 2010 when Bendahara acquired its 56.5% stake at an implied value of RM365m, which works out to 1.2x P/BV.

 The key contributors to the KLB revenues are the automotive logistics division and haulage division, which contributed 36% and 39% respectively to KLB’s total revenue for the FYE 31 December 2012. Presently, KLB provides logistics services to the three local car manufacturers in Malaysia, including Proton. Note that Perodua is a major client of KLB as well.

Outlook  Earnings contributions from its RM7.55b AV8X8 contract will start from FY14 onwards. DRB-HICOM also posses solid and stable concession businesses such as POS Malaysia, Puspakom, KLAS and Alam Flora while its property division is expected to contribute positively in the future with plans to launch property development projects.

Rating  Maintaining our MARKET PERFORM rating, earnings forecasts and our RM2.69 SOP-based target price.

Risks to Our Call Economic uncertainty and a weak consumer sentiment.

Source: Kenanga