DRB-Hicom Bhd
(Sept 23, RM1.46)
Maintain underperform call with a target price (TP) of RM1.02: In an announcement to Bursa Malaysia, DRB-Hicom Bhd and the minority shareholders of Corwin Holding Pte Ltd namely Mohamed Mustafa and Samsuddin Co Pte Ltd and BI Distributors Pte Ltd have proposed to divest the entire 100% stake in Corwin Holding Pte Ltd for RM576.9 million. DRB-Hicom’s effective interest is 90%.

Corwin owns a leasehold property, an eight-storey shopping mall building comprising six floors and two basement levels and another eight-storey building known as “The Chill”. The entire commercial development is collectively known as “The Verge”. The encumbered property has a total gross floor area of 238,527 sq ft and its net book value stood at RM425.6 million as of Mar 31, 2016.

The proceeds from the divestment of RM510 million (after deducting expenses) are expected to be used as working capital for the DRB-Hicom Group. DRB-Hicom is expected to register a gain of RM348 million or 18 sen per share from the Corwin divestment. For illustrative purpose, our TP is expected to be raised by 18 sen to RM1.20 and DRB-Hicom’s net gearing is expected to reduce from 0.63 times to 0.55 times. The proposed sale is expected to be completed in the fourth quarter of 2016 (4Q16).

DRB-Hicom’s outlook remains challenging given the tough operating environment of lower sales of motor vehicles amid stiff competition as well as weak consumer demand. However, the group is looking at a turnaround plan for Proton, which involves an RM1.5 billion soft loan from the government, which is geared towards helping the automaker in its turnaround efforts as well as to expand into domestic and international markets, and to identify a strategic partner by 1Q17. Although the stock price might be lifted temporarily on news of a potential tie-up with a foreign partner, Proton still has to deal with the challenges posed by increasing competition and a weak brand perception. — Kenanga Research, Sept 23