KUALA LUMPUR: CIMB Equities Research is retaining an Add for DRB-Hicom with an unchanged sum-of-parts target price of RM1.69, which is a 10% discount to the realised net asset value.
It said on Monday the potential re-rating catalysts are emergence of a strategic partner for the loss-making car manufacturer Proton and better performance by its services division.
However, the key downside risks are inability to secure a foreign strategic partner for Proton and higher losses incurred by Proton.
CIMB Research said it was positive on a news report that DRB-Hicom has narrowed the choices down to three potential partners for Proton from the seven bids it received in August.
The report, quoting industry sources, stated the companies that were shortlisted are Chinese automaker Geely Automobile Ltd, as well as French automakers Groupe PSA and Renault SA (part of Nissan-Renault alliance). Of the three, only Groupe PSA has confirmed its bid for Proton.
Recall that there was speculation that Germany's Volkswagen, America's General Motors and Japan's Suzuki also made bids.
“We are positive on this news as the new partner should help turn around Proton’s losses in the medium term and reduce DRB-Hicom's share of losses from Proton in the short term,” it said.
Proton could decide on the winning bid by the middle of next year. This is in line with the government’s timeline for Proton to seek and identify a strategic partner, which it stipulated as one of the conditions for the RM1.5bil soft loan. However, in a Bursa Malaysia announcement dated 8 Aug 2016, DRB-Hicom stated that it expects to complete the exercise by 1QCY17.
The partner is expected to provide support in various areas, including advanced technology, global reach and economies of scale. However, considering the fact that Proton also needs equity injection from the acquirer, the exact structure, terms and conditions of the disposal are still highly uncertain.
CIMB Research pointed out in 1QFY3/17, Proton posted net loss of RM244.2mil (or 13 sen a share) which resulted in RM169.3mil net loss for DRB-Hicom. Excluding Proton’s losses, DRB-Hicom’s earnings in 1QFY17 would have swung to net profit of RM74.9m.
“In spite of Proton’s weak performance, the group’s market share remained strong, at 30% of 144,000 of total industry volume (TIV) in 1QFY17. DRB-Hicom distributes other brands, namely Honda, Isuzu, Mitsubishi and Audi.
DRB-Hicom’s auto division earnings have been supported by its non-passenger segment, through DEFTECH (developer, manufacturer and supplier of armoured and logistic vehicles for military and homeland security) and CTRM (manufacturer and supplier of composites aero structures for the world’s major aircraft manufacturers).
DRB-Hicom’s service division includes Pos Malaysia, Bank Muamalat and companies with government concessions for solid waste management (Alam Flora) and vehicle inspection (Puspakom).
“The recent injection of KLAS, a provider of aviation ground services to airlines, into Pos resulted in the group’s stake in cash-rich POS increasing. This could improve DRB-Hicom’s capital position and earnings profile,” CIMB Research said.
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