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Wednesday, March 29, 2017

HLIB Research retains Buy on DRB-Hicom with RM2 target price

Wednesday, 29 March 2017 | MYT 11:05 AM

Proton needs to find a strategic foreign technical partner to fulfil conditions set by the government for its approval of its RM1.5bn soft loan to Proton last year.

KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is maintaining its Buy rating on DRB-Hicom with a RM2 target price, which is an upside of 45% upside, based on 20% discount to sum-of-parts.

It said on Wednesday DRB-Hicom was trading at undemanding valuation at 0.42 times price-to-book (P/B), which is 26% lower than its 10-year historical average of 0.57 times.

“Overall, DRB-Hicom’s core profit after tax and minority interest (PATAMI) is expected to leapfrog to RM298mil in FY19 from a loss of RM324mil in FY17E,” it said.

HLIB Research said the positive outlook was based on (1) the potential entry of Proton’s foreign strategic partner (FSP); (2) steady earnings from the RM7.5bil AV8 contract; and (3) ongoing plans to dispose of non-core assets to relieve the balance sheet.

It also said (4), it was optimistic on the long term positive outlook of Pos Malaysia, following the launch of Malaysia Digital Free Trade Zone (DFTZ) due to its direct involvement in the e-fulfilment hub and potential synergies with its other business areas (last mile delivery, haulage, freight forwarding, etc.).

Meannwhile, HLIB retail research said DRB-Hicom’s share price is “bottoming up” to retest RM1.46-RM1.55 zones.

Despite recent selling pressures, DRB-Hicom has maintained a strong support above the 50-SMA near RM1.31 amid undemanding valuation and imminent Proton FSP announcement by June.

“On the back of bullish hourly chart and bottoming up daily indicators, share prices are likely to test immediate resistances at RM1.43 (daily upper Bollinger band) and year-to-date high at
RM1.46 soon.

“A decisive break above RM1.46 could potentially signal that the next leg up towards 52-week high at RM1.55. Key supports are RM1.34 and RM1.31. Cut loss at RM1.30,” it said.

To recap, it also pointed out that DRB-Hicom’s MD managing director Datuk Seri
Syed Faisal Albar had recently cleared the air following the South China Morning Post report that Geely Automobile Holdings (Geely) has pulled out its bid to acquire an equity stake in Proton.

The stock retraced from YTD high of RM1.46 (Feb 27, March 3 and 20) to a low of RM1.34 lately (March 27 and 28). Moreover, Geely’s decision to pull out for the bid also reduces the possibility of DRB-Hicom getting maximum value for its stake in Proton.

“Nevertheless, DRB-Hicom’s share prices rebounded four sen to end at RM1.38 yesterday following Syed Faisal’s statement that the detailed FSP’s evaluation (with three key criteria, namely strategic, operational and cultural fit) is still ongoing, given a new proven partner that can offer technology, capabilities and new markets, will push Proton as a brand to be reckoned with.

Syed Faisal also reaffirmed the group's statement last Friday that all bidders are still in the running to be selected as Proton's FSP after news reports stating that Proton was only left with only one bidder.

DRB-Hicom is expected to make the final decision by mid-2017. To recap, Proton needs to find a strategic foreign technical partner to fulfil conditions set by the government for its approval of its RM1.5bn soft loan to Proton last year.


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