News

In an announcement to Bursa Malaysia DRB-Hicom has made an offer to 32.3%-owned POS Malaysia to dispose the following to POS Malaysia: 1) 100%-owned KL Airport Services Sdn Bhd (KLAS) comprising 88.3m ordinary shares of RM1.00 each in KLAS, 35.3m cumulative redeemable convertible preference shares of RM1.00 each in KLAS and such number of New KLAS Shares (as an integral part of the deal KLAS shall transfer 2 parcels of agriculture land measuring a total of 100 acres to DRBHicom, capitalise existing loan facility obtained by KLAS via the issuance of new KLAS shares, and conversion of inter-company loan owning by KLAS to DRB totalling RM182.9m via issuance of new KLAS shares to DRBHicom) to be issued on a later date, for a total disposal consideration of RM766.2m;

and 2) part of a parcel of freehold industrial land in Pekan HICOM, District of Petaling, State of Selangor Darul Ehsan located along Jalan Jijan 28/35, Section 28, 40400 Shah Alam measuring 9.912 acres for a disposal consideration of RM69m.

The total disposal consideration of RM835.2m in respect of the Proposed Disposals shall be satisfied via the issuance of 250.8m new ordinary shares of RM0.50 each in Pos Malaysia to HICOM Holdings at an issue price of RM3.33 per Pos Malaysia Share (13% premium to last traded price of RM2.95).

Note that DRB-HICOM and persons acting in concert intend to seek an exemption from the Securities Commission Malaysia from the obligation to undertake a mandatory takeover offer for the remaining Pos Malaysia Shares not already owned by them after the Proposed Disposals.

Comments

We are neutral on this latest corporate development by DRBHicom. The loss of income from KLAS is expected to be compensated by higher equity stakes in POS Malaysia if the proposed offer goes through.

This deal allows DRB to consolidate its logistics business under 32.3%-owned POS Malaysia. Combining Konsortium Logistik Berhad’s (KLB’s) warehousing capacity of 1.4m square feet with Pos Malaysia’s more than 700 touch points in the country and KLAS’ air connectivity, this deal allows POS Malaysia to offer a complete air-sea-land transportation solution that will include warehousing, distribution and supply chain management i.e first and last mile presence.

For illustrative purposes (impact to financials) : (i) the exit PER is >100x considering that KLAS only register a pre-tax profit of RM7.5m in FY15; (ii) if the proposed disposal goes through, DRBHicom effective stakes in POS Malaysia could be 54%.; (iii) marginally reduce DRB Group net gearing of 66% as at 30 Sept 2015 due to POS Malaysia net cash of RM560m as at 30 Sept 2015; and (iv) loss of income from KLAS would be compensated by higher effective stakes in POS Malaysia (the additional stake in POS Malaysia could bumped up our FY17 net profit conservatively by 10-20%).

Outlook

Earnings contributions are expected to come gradually from the RM7.55b AV8X8 contract while the property division is expected to contribute positively from several launchings. However, Proton is seen to continue losing market share resulting in the automotive division dragging down earnings.

However, the inconsistent performance and losses from the automotive division has dragged down DRB’s earnings over the last few quarters.

Change to Forecasts

No change to our earnings forecasts.

Rating & Valuation

Maintain UNDERPERFORM and our SoP-derived target price of RM1.06.

Risks to Our Call

Upside risk: Better-than-expected performance in the automotive division.

Source: Kenanga Research - 11 Dec 2015