DRB Hicom - Several proposals on the table for Proton’s revival BUY

We reaffirm our BUY rating on DRB-Hicom with our fair value unchanged at RM4.00/share, pegging a 10% discount to our sum-of-parts value of RM4.40/share.

It was reported in the press today that DRB is evaluating plans by Mitsubishi, Volkswagen and General Motors (GM) to revive Proton.

GM has proposed to gain control of half of Proton’s production lines at the latter’s plant in Tanjung Malim. This is not something new as it was already speculated in the market earlier that GM plans to buy a 50% stake in the plant. This proposal makes sense given the much-publicised under-utilised Tanjung Malim plant – running at barely 50% utilisation. A valuation of RM800mil for the plant stake has been bandied about but the key point here is that Proton would be able to achieve economies of scale. 

Mitsubishi, meanwhile, has put forward a proposal to utilise Proton’s spare capacity to produce some 200,000 engines with a horse power between 1,600cc and 2,000cc.

Not surprisingly, it seems DRB prefers to work with Volkswagen to produce B-segment cars. Apart from technology, DRB would be able to leverage on Volkswagen’s strong global distribution network to market Proton’s car overseas. We are not ruling out equity participation by VW for this exercise. 

Notwithstanding that, we believe DRB’s immediate focus on Proton would be very much on plugging the ‘leakages’ within the latter’s operation and we suspect, mostly in the rationalisation of parts supply. 

On the other hand, DRB has not decided whether to sell or keep the loss-making Lotus, given that due diligence on the latter can only be done once the MGO is completed. Having said that, the disposal of Lotus would bring an additional RM200mil-RM300mil income to Proton. 

We continue to like DRB, given it is one of the cheapest conglomerates – trading at CY12 of 13x versus its peers of 18x. The group is on an exciting growth path, as it is the best proxy to VW’s ambition to be a key ASEAN auto player. DRB would also benefit in the transformation of Pos Malaysia – recently showing strong a set of results – and the next leg up would be to reap the synergies with its sister company, Bank Muamalat.

Source: AmeSecurities