DRB-Hicom - Honda tie-up – a prelude to Proton’s revival Buy

- We reaffirm our BUY rating on DRB Hicom, with our fair value unchanged at RM3.80/share – a 10% discount to its SOP value of RM4.20/share. 

- It was announced to Bursa Malaysia yesterday that DRB’s Proton has signed a collaboration agreement with Honda Motor Co. Ltd Japan (Honda). This agreement is inked with a view for both parties to explore collaboration opportunities in the areas of technology enhancement, new product line up, platform and facilities’ sharing. 

- Although it has been well-communicated by DRB that it will be leveraging on its existing partners to revive Proton, we are surprised that Honda came into the picture as it was heavily speculated that a VW tie-up was imminent. Recall that currently, DRB has an arrangement with Honda for the contract assembly of Honda CKD units via its effective 34%-stake. 

- Nonetheless, details are sketchy at this juncture.  The following are key take-aways from our discussion with the management:

- (1) There will not be any equity participation by Honda; thus, we believe there should be some royalty compensation for Honda and the existing business arrangement with Honda will continue as usual.

- (2) The focus of this tie-up would be to develop a 2.0 litre-car via platform sharing, which we believe is for the long-awaited Perdana replacement model and which could also involve engine development. Although Honda has a strong footing in this segment via the Accord model, cannibalisation is not an issue due to distinct pricing. We understand that DRB targets finalisation of this tie-up within six months. 

- (3) There is further upside as we believe there will be a similar arrangement with its other partners to produce models in different segments. We are not ruling out a tie-up with VW Group to produce B segment cars. Apart from the technology, DRB would be able to leverage on VW’s strong global distribution network to market Proton’s cars overseas. Plus, this would address the under-utilised plant issue in Tanjung Malim.

- On the flipside, while gearing is currently is on the higher side (net gearing as at end of June: 0.7x%) DRB intends  to trim down its debt to RM1bil-RM1.5bil by next year. This is already under way with the proposed divestment of Hicom Power. Further divestments of non-core businesses – Bank Muamalat and UniAsia Capital – would further ease its balance sheet.  

- From a valuation standpoint, DRB is currently trading at an attractive CY13 PE of 8x versus its conglomerate peers’ 17x. It is also trading at a steep discount of 41% to its SOP value.

Source: AmeSecurities