CIMB Research upgrades DRB-Hicom from Hold to Add

CIMB Equities Research has upgraded DRB-Hicom from Hold to Add with a higher target price of RM1.60

KUALA LUMPUR: CIMB Equities Research has upgraded DRB-Hicom from Hold to Add with a higher target price of RM1.60 based on a 10% discount to realised net asset value (RNAV). Its previous target price was RM1.02.

It said on Friday it had changed its valuation methodology from price-to-book value (P/BV) basis to RNAV to better reflect the value of the company given the recent positive developments (divestment of The Verge, integration of logistics/postal services, potential new partner for Proton). 

Key downside risks are: (i) the divestment plan does not go through, (ii) no foreign strategic partnership for Proton, and (iii) Proton’s earnings deterioration.

DRB-Hicom announced that its indirect unit had signed an agreement with new potential buyer to dispose of its entire 90% equity interest in Corwin Holding Pte Ltd. The deal will allow them to unlock the value of their non-core assets. 

“We think that the purchase consideration for this new deal will be at similar levels as the previous aborted deal which was at S$317mil (RM958.5mil). Assuming the same value, the gains from this deal would be 30 sen per share,” it said.

At the shareholders meeting last week, DRB-Hicom received the go ahead to sell KL Airport Services Sdn Bhd (KLAS) for RM749.35mil and an indirect wholly-owned subsidiary, Hicom Indungan Sdn Bhd, as part of a freehold industrial land in Shah Alam, was sold for RM69mil. 

“We view these disposals to Pos Malaysia as positive as they consolidate DRB’s logistics business and create greater synergy, as DRB-Hicom’s stake in Pos Malaysia also increases from 32.2% to 53.5%,” it said.

CIMB Research also said the media reported that several leading automakers from Europe, China and Japan have expressed interest in a stake in Proton, with one of them being Geely Automobile Holdings. We see a potential foreign partner as positive for Proton because: 1) it will receive much needed capital injection for R&D and working capital, 2) there will be potentially new technology transfer, and 3) it would benefit from a platform sharing strategy.

“We expect stronger sales volume in 2H16 driven by the launches of three new models targeting the mass-market, namely Persona (tentatively in August), followed by Saga in September, and a B-segment multi-purpose vehicle in October. This will also allow Proton to regain some market share. 

“Furthermore, DRB should also benefit from the expected surge in sales for Honda following the successful launch of the new Honda Civic sedan,” said the research house.