In an announcement to Bursa Malaysia, DRB-Hicom (DRB) and the minority shareholders of Corwin Holding Ptd Ltd has proposed to divest the entire 100% stake in Corwin Holding Pte Ltd for RM576.9m (SGD189.8m). DRB is expected to register a gain of RM348m or 18.0 sen/share from the Corwin divestment. However, this latest corporate development is not sufficient to raise our recommendation. Maintain UNDERPERFORM. Our SoP-derived target price is RM1.02.

Divestment of Corwin for RM576m. In an announcement to Bursa Malaysia, DRB-Hicom (DRB) and the minority shareholders of Corwin Holding Ptd Ltd namely Mohamed Mustafa & Samsuddin Co. Pte Ltd and B.I. Distributors Pte Ltd has proposed to divest the entire 100% stake in Corwin Holding Ptd Ltd for RM576.9m (SGD189.8m). DRB effective interest is 90%. Based on the divestment price, the disposal works out to; (i) 3.4x Corwin Holdings’ net assets as at FYE Mar 16, and (ii) >100x PER (Corwin net profit in FY Mar-16 was SGD1.1m).

Corwin owns a leasehold property, an eight-storey shopping mall building comprising six floors and two basement levels and another eight-storey building known as “The Chill”. The entire commercial development is collectively known as “The Verge”. The encumbered Property has a total gross floor area of 238,527 square feet and its net book value is RM425.6m (SGD140m) as of 31 March 2016.

Gains of RM348m or 18.0 sen/share. The proceeds from the divestment of RM510m (after deducting expenses) is expected to be used as working capital for the DRB-Hicom group. DRB is expected to register a gain of RM348m or 18.0 sen/share from the Corwin divestment. For illustrative purposes; i) our SoP Target Price is expected to be raised by 18.0 sen to RM1.20; and ii) DRB-HICOM net gearing is expected to reduce from 0.63x to 0.55x. The proposed sale is expected to be completed in 4Q 2016.

Outlook. The outlook for DRB remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition as well as weak consumer demand. However, the group is looking at; (i) a turnaround plan for PROTON, which involves RM1.5b soft loan from the Government, which is geared towards helping PROTON in its turnaround efforts as well as to expand into domestic and international markets, and (ii) to identify a strategic partner by 1QCY17. Although the stock price might be lifted temporarily on news of a potential tie-up with a foreign partner, Proton still has to deal with the challenges posed by increasing competition and a weak brand perception.

Maintain UNDERPERFORM. We maintain our earnings forecasts and TP pending completion of the proposed sale. We are positive on this latest corporate development by DRB-Hicom, which is seen as a positive step to divest its non-core assets. However, this latest announcement by DRB-Hicom is not sufficient to upgrade our recommendation. Maintain UNDERPERFORM. Our SoP-derived target price is RM1.02.

Source: Kenanga Research - 23 Sep 2016