News

• DRB has proposed to dispose its 100% owned Hicom Power for a total cash consideration of RM575m to Malakoff and expected disposal gain of RM446.2m or RM0.23/share. The exercise is expected to complete by end 2012.
• DRB’s original cost of investment was RM294.6m back in Dec 2008 and has cumulatively received RM252.7m dividend from Hicom Power.
• Hicom Power provides operation and maintenance services to Tanjung Bin’s 3x700MW power plant for a concessionaire period of 25 years commencing Sept 2006.
• The proceeds will be used to pare down debts by ~RM574.1m (reduce net gearing to 48.1% from 57.2%) after incurring high debts in acquiring Proton in mid-2012. Interest saving expected to be ~RM37.2m pa due to lower gearing.
• DRB’s net asset will also improve to RM3.49/share from RM3.26/share (as at Jun 2012).
• Based on FY03/12 income statement, Hicom Power contributed RM57.4m or 4.2% of DRB’s net profit.
• The disposal is subject and conditional approvals by: 1) shareholders of DRB; 2) shareholders of MMC; 3) consent of DRB’s financiers; and 4) relevant authorities/parties.

Comments

• We are not surprise with the disposal, as it was being hinted by COO Datuk Seri Che Khalib during our luncheon dialogue (refer to our report dated 18/10/2012).
• We are positive on DRB’s on-going effort in restructuring its business structure (disposing non-core assets), reducing gearing level, lowering group financing cost as well as unlocking hidden value.
• We expect more positive newsflow within the next few months such as Proton’s restructuring plan, Uni.Asia disposal, Bank Muamalat M&A etc.

Risks

• Prolonged bank tightening measures on lending rules.
• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

• Unchanged, pending the completion of disposal.

Rating

BUY

• Positives –
  • Acquiring Proton (restructuring of Proton), to turn DRB into a major integrated automotive player in the region.
  • Partnering VW group to set up regional hub in Malaysia.
  • Honda Malaysia to set up regional hub for Hybrid car.
  • Severely undervalued counter.
  • Deftech awards of RM7.55bn over 7 years.
  • Synergy of POS with DRB’s other business units.
• Negatives –
  • Bank tightening financing measures.

Valuation

• Maintained Buy recommendation with unchanged Target Price of RM3.43.

Source: Hong Leong Investment Bank Research - 19 Oct 2012