DRB-Hicom gains traction

This article first appeared in The Edge Malaysia Weekly, on August 12, 2019 - August 18, 2019.
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LATE last month, conglomerate DRB-Hicom Bhd’s stock hit its 52-week high of RM2.71. The upward momentum has been ongoing, with the group’s share price having gained more than 60% since end-January.

Much of the enthusiasm has been fuelled by DRB-Hicom’s 50.1% unit, Proton Holdings Bhd, which has turned the corner, registering a profitable fourth quarter for its financial year ended March 2019.

Group managing director Datuk Seri Syed Faisal Albar Syed A R Albar could not be contacted for this article.

RHB Investment Bank has DRB-Hicom as its top pick in the automotive sector while AmInvestment Bank Bhd upgraded the stock to a “buy” from a “hold” previously and nudged its fair value up to RM3.18 from RM1.78 previously.

Hong Leong Investment Bank Research has projected that Proton will register an encouraging profit of at least RM100 million from revenue of RM1.3 billion in 4QFY2019.

AmInvestment, in a report in end-July, says that by year-end, Proton could secure second place in terms of market share, behind only Perusahaan Otomobil Kedua Sdn Bhd, as its current year-to-date market share of 14.7% is very close to second-placed Honda’s 14.9%. This optimism is buoyed by “the continuing strong demand for the X70, Iriz and Persona, together with the upcoming introduction of the Saga 2019 facelift in October”, according to AmInvestment.

In DRB-Hicom’s 2018 annual report, released late last month as well, chairman Datuk Mohammad Zainal Shaari says, “After three years of operating losses, we recorded our first year of operating profit of RM342 million on the back of revenue of RM12.48 billion.” DRB-Hicom registered a net profit of RM51.19 million on revenue of RM12.48 billion in FY2019.

At its close of RM2.62 last Thursday, DRB-Hicom’s market capitalisation was just below RM5.1 billion. Nevertheless, as at end-March, the group’s net asset per share was RM3.47.

Then again, there are some who are wary of the current enthusiasm at DRB-Hicom.

One fund manager says he is “wary” of DRB-Hicom as there are many defence-related contracts that may come under the spotlight. Less than three months ago, DRB-Hicom’s wholly-owned subsidiary Defence Technologies Sdn Bhd (Deftech) — which manufactures, assembles and supplies military and commercial vehicles — was investigated by the Malaysian Anti-Corruption Commission (MACC) for discrepancies over a RM17 million contract for the provision of equipment for military vehicles.

Two of Deftech’s top officials were arrested on suspicion of receiving bribes in the contract for the supply of equipment for the AV8 and Adnan armoured personnel carriers between 2015 and 2017, and subsequently charged under Section 16(a)(A) of the MACC Act.

Back then, it was reported that AmInvestment was downgrading DRB-Hicom to an “underweight” call from a “hold” call, with a lower fair value of RM1.74 after increasing the discount of the group’s sum-of-the-parts valuation to 30% from 20% previously. In essence, the downgrade was hinged on the potential negative sentiment brought about by the arrest of the executives by the MACC and uncertainties regarding the group’s clout in securing future government contracts.

There have also been murmurs as to more contracts being in the crosshairs of the authorities, but this remains conjecture at press time.

DRB-Hicom has, after all, secured several large-scale defence jobs, including a RM8 billion contract to develop and supply as many as 257 8x8 armoured-wheeled vehicles in 2010. While there has been talk of DRB-Hicom not delivering on this contract, an analyst from a local bank-backed brokerage says that as far as she knows, 161 of the vehicles have been delivered with another 44 slated to be handed over by the end of the year. The remaining 52 vehicles are expected to be delivered by end-2021, she adds.

She says her “outperform” call on DRB-Hicom is premised on the outlook for a more buoyant automotive sector and the fact that its unit, Composites Technology Research Malaysia Sdn Bhd (CTRM), has an order book of RM8.3 billion, which should be a good buffer. CTRM is involved in the aerospace and composite industries.

While there may be fears, it is noteworthy that DRB is 55.92% controlled by businessman Tan Sri Syed Mokhtar Albukhary, who is known to be a close associate of Prime Minister Tun Dr Mahathir Mohamad.

Another analyst The Edge spoke to says that even if DRB-Hicom is investigated by the MACC, it is individual employees or former employees who are going to bear the brunt of the investigations.

“You must understand, it’s the executives, the officers who committed an offence, not the company. So, there is no wrong by the company, and, therefore, for DRB-Hicom, it’s business as usual,” he says.

According to Bloomberg, there are five “buy” calls and one “hold” recommendation on DRB-Hicom. Analysts have a median target price of RM2.89 on the counter, translating into an upside of 10.3%.



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