Highlights

DRB has grown and transformed tremendously within a short span of 2 years, with significant milestone achieved e.g. acquisition of Proton and Pos Malaysia, collaboration with Volkswagen and Honda, and concessionaires/contracts awarded by the government.

Appointments of key corporate leaders, Dato’ Sri Che Khalib (ex-CEO of Tenaga) and Datuk Mohamed Razeek (ex- CEO of MRCB) to spearhead the group transformation and improve corporate governance.

Developments at Pekan facilities:

1. ICAM to nurture talents in supporting the future growth of DRB as well as the Malaysia automotive industry.
2. VW regional assembly plant is on track for completion and commences operation by end 2012.
3. DHAS provides strong backbone support (value-added services) to DRB’s automotive division.
4. Manufacturing (Suzuki, Mercedes, Isuzu) is running at full capacity (single shift) and still has room for growth to cater for increasing demands with minimal capex.
5. Deftech is on track to start delivery of 257 AV8s starting 1H13, which is worth RM7.55bn over 7 years.

Rapid restructuring and integration of Proton into the group, and achieving strong synergies.

Catalysts

We are encouraged by DRB’s development and commitment in becoming a leading automotive player (with its own marque – Proton) in the region similar to Astra International of Indonesia, as well as the transformation.

Improving corporate governance exercises and relationship with the investment communities are likely to improve market awareness and re-rate the group at higher valuation.

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

Cut FY13-15E earnings by 2.4-5.8% mainly due to loss of contribution from HICOM Power starting early 2013.

Rating

BUY

Positives –

• Acquiring and 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 with higher TP of RM3.52, based on SOP, after imputing lower net debt at holding company level.

Source: Hong Leong Investment Bank Research - 16 Nov 2012