DRB-Hicom Bhd
(June 16, RM1.65)
Maintain outperform with unchanged target price of RM2.71: DRB-Hicom announced that its wholly-owned subsidiary Proton Holdings has signed a memorandum of understanding (MoU) and licence agreement with Suzuki Motor Corp, Japan (SMC).

SMC is an international car manufacturer and distributor of its own and other brand automobiles, motorcycles, all-terrain vehicles and any other products in the world. Currently, Suzuki is operating through its co-owned subsidiary, Suzuki Malaysia Automobile Sdn Bhd (SMA), which is 40%-owned by DRB-Hicom. According to Proton chief executive officer Datuk Abdul Harith Abdullah, this collaboration will complement its long-range product plan, as Suzuki is strong for its technology and expertise in producing smaller engine segments. Thus, this will help to complete the offerings of a different segment of vehicles in Proton and also benefit the local carmaker in terms of reducing its research and development and production costs. Production in the first phase of the project is expected to start in the next 16 months at the Tanjung Malim plant.

The MoU is positive for Proton as we believe this collaboration presents the carmaker with an opportunity to improve market confidence in Proton’s brand that has a declining market share in Malaysia. It offers potential for future growth by introducing new models in the  compact and small car categories (A-segment) and will help to improve its sales volume. 

If this collaboration is successful, Proton could potentially overtake Perodua, which is currently the market leader in Malaysia’s automotive market. For Proton’s long-term sustainability, we expect more collaboration with other original equipment manufacturers in the future.

We believe the partnership and collaboration of Proton and Suzuki are beneficial to the automotive segment of the group and to Proton’s long-term growth. We anticipate stronger earnings from the group’s defence and aviation business, DRB-Hicom Defence Technologies Sdn Bhd and Composite Research Technology Malaysia Sdn Bhd, as well as from its 34%-owned associate, Honda Malaysia, which will mitigate Proton’s weakness. — PublicInvest Research, June 16

This article first appeared in The Edge Financial Daily, on June 17, 2015.