Disposal of Alam Flora expected to help DRM-Hicom realise underlying value of non-core assets

This article first appeared in The Edge Financial Daily, on August 3, 2018.
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DRB-Hicom Bhd
(Aug 2, RM2.32)
Maintain outperform with an unchanged target price of RM2.40:
DRB-Hicom Bhd has entered into a conditional share sale agreement (SSA) with Tunas Pancar Sdn Bhd, a wholly-owned subsidiary of Malakoff Corp Bhd, to dispose of its entire 97.37% stake in Alam Flora Sdn Bhd for a cash consideration of approximately RM944.6 million, subject to any adjustment or revision pursuant to the terms and conditions of the SSA. The remaining 2.63% stake is owned by the Pahang state government.

Alam Flora is involved in integrated solid waste collection and public cleansing management services in the state of Pahang, Kuala Lumpur and Putrajaya. It has a concession period of 22 years until Sept 1, 2033. The proceeds from the disposal will be partly used to repay certain Islamic medium term notes and borrowings, and finance the development cost for Proton’s new models within the next 12 months.

The proposal is subject to: i) approval of the government for the change of shareholder and shareholding structure; ii) waiver of the Pahang state government of its pre-emptive rights; iii) approval of Minister of Finance Inc, being a holder of a special share in Hicom Holdings; iv) approval of shareholders of DRB-Hicom and Malakoff; and v) approval of financiers of Alam Flora and any of the companies under DRB-Hicom and its subsidiaries. The proposed disposal is expected to be completed by the first quarter of 2019.

We view the disposal of its waste collection business positively as it will help to realise the underlying value of non-core assets within the group. DRB-Hicom is estimated to receive a one-off gain on disposal of RM735.4 million. Valuation-wise, we view the disposal price of 9.7 times price-earnings ratio (PER) (based on Alam Flora’s financial year 2018 financials) as attractive as it is above our valuation of eight times PER. — PublicInvest Research, Aug 2