In an announcement to Bursa Malaysia, DRB-Hicom proposed to divest a portfolio of property assets for a total consideration of RM1.93b to be satisfied via; i) approximately 1,243.5 acres of freehold land in Tebrau, Johor, and ii) cash consideration of RM288.7m. DRB-Hicom is expected to record RM849m gain from the proposed disposals. We are keeping our FY18E and FY19E forecasts unchanged. Reiterate MP rating and SoP-derived target price of RM2.50.

Divestment of non-core property assets and exiting hospitality industry totalling RM1.93b. DRB-Hicom proposed to divest a portfolio of property assets for a total consideration of RM1.93b to be satisfied via; i) approximately 1,243.5 acres of freehold land in Tebrau, Johor, and ii) cash consideration of RM288.7m. DRB-Hicom is expected to record RM849m gain from the proposed disposals. The proposed disposals entail the disposal of the following to Prisma Dimensi (Tan Sri Dato’ Seri Syed Mokhtar Shah bin Syed Nor is the ultimate shareholder) at the respective disposal consideration; i) property assets held by subsidiary companies of DRB-HICOM (please refer to overleaf), for a total consideration of RM1.43b; ii) total effective equity interest of 70.6% in Horsedale via the following: (a) disposal 58% equity interest in Puncak Permai which in turn holds 70% equity interest in Horsedale; and (b) disposal by HICOM of 30% equity interest in Horsedale, for a total consideration of RM331.8m; and iii) Rebak Island (for a consideration of approximately RM170.4m (the owners of Vivanta Rebak Island Resort by Taj located on Rebak Island, Langkawi, and Holiday Inn Glenmarie Kuala Lumpur and Glenmarie Golf & Country Club, both situated next to each other in Glenmarie, Shah Alam). Based on the asset divestment consideration of RM1.93b and 1,243.45 acres of freehold land in Tebrau, District of Johor Bahru, Johor, the land works out to RM35 per square feet (psf) which appears fair considering the asking price in the vicinity is between RM25psf and RM55psf. The deal is expected to be completed by 1Q 2019.

Moving into industrial lands. We were not overly surprised by this latest corporate development by DRB-Hicom. We believe the proposed disposals will allow the Group to unlock the value of the DRB-HICOM lands, which are non-core property assets and investments. With the Johor land, the Group’s prospective industrial land bank will increase from 600 acres to 1,843 acres or by approximately 207%. The group’s existing industrial land bank is located in Kedah, Perak and Melaka, totalling approximately 600 acres. Parts of its land bank in Perak and Melaka are currently being developed as industrial parks.

RM849m gain from divestment. For illustrative purposes, the proposed divestment would result in RM849m gain or 43.0 sen/share. DRB-Hicom’s BV/share would rise from RM3.14 to RM3.57 as at 30 Dec 2017. Ceteris paribus, our sum-of-parts TP would rise from RM2.50 to RM2.93. However, we are keeping our FY18E/FY19E earnings unchanged as well as our sum-of-parts TP until completion of the proposed divestment. The proposed disposal is subject to approval of DRB-HICOM shareholders at an extraordinary general meeting.

Maintain Market Perform. Our SoP-derived target price is RM2.50. We are keeping our FY18E/FY19E earnings unchanged as well as our sum-of-parts TP until completion of the proposed divestment.

Key upside risk to our call is faster-than-expected roll-out of new models under the new Geely-Proton management.

Source: Kenanga Research - 9 Mar 2018