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This article first appeared in The Edge Financial Daily on May 11, 2017

DRB-Hicom Bhd
(May 9, RM1.50)
Maintain add call with a higher target price (TP) of RM2.25:
We visited DRB-Hicom Bhd’s automotive assembly plants, automotive university and defence vehicle assembly plant in Pekan, Pahang at end-April.

The visit was an eye-opener as we developed greater appreciation for DRB-Hicom’s automotive manufacturing and defence vehicle assembly capabilities, which contributed positive operating profit to the automotive division in FY16. We were also encouraged to see DRB-Hicom expanding its automotive ecosystem, with the aim of transforming the DRB-Hicom Automotive Complex into a self-sustaining regional automotive centre with state-of-the-art technology.

Our first stop was Hicom Automotive Manufacturers Malaysia (HAMM), which specialises in the assembly of foreign marques and commercial vehicles. HAMM recently completed the construction of a new RM230 million paint shop, which is expected to boost the production capacity for Volkswagen models from 25,000 to 50,000 units a year.

We also visited DRB-Hicom University of Automotive Malaysia (DHU), a private educational institution that aims to produce skilled workers for the automotive sector. DHU was accorded university status in October 2015. It is equipped to deliver tertiary education and undertake research at an international level. It currently has more than 1,000 students registered in 34 programmes and has the capacity to accommodate up to 7,000 students. Management aims to add more programmes and faculty members to attract both local and international students.

We ended our visit at DRB-Hicom Defence Technologies  Sdn Bhd (Deftech), which carries out contract assembly of defence vehicles. Deftech was awarded a RM7.55 billion contract in February 2011 to supply 257 units of AV-8 armoured wheeled vehicles to the Malaysian Army from 2014 to 2020. We estimate Deftech has only completed about 26% of the AV-8 project at end-financial year 2016 partly due to the tightening in the government’s defence budget allocation.

We maintain our “add” call with a higher sum-of-parts-based TP of RM2.25 at 10% discount to its revalued net asset value as we assign higher valuations to the group’s defence (Deftech) and aviation (Composites Technology Research Malaysia Sdn Bhd) divisions, as well as Pos Malaysia Bhd following the surge in its share price in April. Our call is supported by the imminent foreign strategic partner (FSP) for Proton. Key downside risks are no FSP for Proton and deterioration in Proton’s earnings. — CIMB Research, May 9

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