Wednesday August 29, 2012
DRB-Hicom prospects seen bright
By THOMAS HUONG
PETALING JAYA: The market remains positive about DRB-Hicom Bhd's prospects despite the conglomerate posting a steep 64% year-on-year drop in net profit to RM32.6mil for its first quarter ended June 30.
DRB-Hicom had attributed the earnings decline to higher finance cost following the acquisition of Proton Holdings Bhd, as well as the losses incurred by Proton's wholly-owned subsidiary Lotus. DRB-Hicom completed its 100% acquisition of Proton on June 26.
According to HwangDBS Vickers Research, investors should look beyond the automotive conglomerate's near-term earnings weakness given DRB-Hicom's proactive measures to turn around Proton and Lotus.
“It is also gearing up for regional expansion as Honda Japan is making Malaysia its regional manufacturing hub for hybrids with committed capital expenditure of RM1bil over the next three years.”
DRB-Hicom has a 34% stake in Honda Malaysia Sdn Bhd.
The research unit said at 9 times financial year 2014 forecast price-to-earnings (PE) and 0.7 times price-to-book value (P/BV), valuations remain attractive for a growing conglomerate with strong proactive management.
HwangDBS Vickers Research also cut its forecast earnings for DRB-Hicom by 17%, 9% and 7% for financial years 2013, 2014 and 2015 respectively.
“This includes losses at Lotus, but that will slowly narrow with the revised turnaround plan and strong bookings so far for the recently launched Exige S.”
The research unit also pointed out that sales of the Preve was understood to have reached 16,000 units with 10,000 to 11,000 units delivered so far.
“The unlocking of value of the 4,000-acre Proton City will also help to recoup some of its investments in Proton,” it said.
HwangDBS Vickers Research also said the sale of DRB-Hicom's insurance business raising RM354mil (at two times book value) and the sale of 30% in Bank Muamalat for RM542mil (at 1.2 times book value) could raise RM896mil.
“This could lower net gearing to 0.5 times from 0.6 times currently, and give it more flexibility to further grow its automotive business which may be more capital expenditure heavy.”
In another report, RHB Research Institute said it believed DRB-Hicom had multi-year latent earnings potential and hidden asset value.
“Clearly, some time will be needed to implement new initiatives. We believe the current share price represents an attractive entry point for longer-term outperformance coupled with limited downside.”
RHB Research said a market re-rating for DRB-Hicom could come from positive traction from ongoing efforts to revamp Proton, including news flow from potential cooperation agreements with other global OEMs (original equipment manufacturers).
HwangDBS Vickers Research has a “buy” call on DRB-Hicom's stock with a target price of RM3.35, while RHB Research maintained its “outperform” call and raised its fair value to RM3.60 (from RM3.35 previously).
Hong Leong Investment Bank's (HLIB) research unit has maintained a buy call on DRB-Hicom's stock with an unchanged target price of RM3.43.
HLIB Research said the positives for DRB-Hicom included the acquisition of Proton, to turn the conglomerate into a major integrated automotive player in the region, partnering Volkswagen group to set up regional hub in Malaysia, being a severely undervalued counter, DRB-Hicom Defence Technologies Sdn Bhd's (Deftech) awards of RM7.55bil over seven years, and the synergy of Pos Malaysia Bhd with DRB-Hicom's other business units.
DRB-Hicom shares declined 3 sen to RM2.52 at the close yesterday.