CIMB Research retains Add for DRB-Hicom with RM1.69 target price

According to Proton, 20% to 30% of the parts in its vehicles are imported

KUALA LUMPUR: CIMB Equities Research is maintaining its Add call on DRB-Hicom, with an unchanged sum-of-parts based target price of RM1.69, which is 10% below its realised net asset value (RNAV). 

It said on Monday its Add call was supported by the imminent foreign strategic partner (FSP) for Proton Holdings Bhd (Proton) and better performance by DRB-Hicom’s services division.

StarBizWeek reported that French PSA Group (PSA) is likely to be chosen as the FSP for Proton as it presented the best proposal to rescue and expand Proton’s operations in Asean. PSA plans to raise Proton’s capacity from 150,000 units a year to between one million and two million units a year.

The report also said PSA proposed to consolidate Proton’s production by transferring the production lines in the Shah Alam plant to the underutilised Proton City plant in Tanjung Malim in order to gain better economies of scale and become more competitive. 

PSA is said to be ready to finance the construction of the new plant in Tanjung Malim. According to the latest filling, PSA Group had net cash of €4.5bil as at December 2015.

StarBizWeek also reported that another contender for controlling stake in Proton, Geely
Automobile Holdings (Geely), was more interested in acquiring Lotus (British sports car manufacturer) than taking a stake in Proton. 

CIMB Research also said it was not surprised that Geely is seeking to tap into Lotus’s engineering technology and experience in consulting and development for other global automakers.

“We think PSA would be a good fit for Proton given its strength in the sports utility vehicle (SUV) segment. The article mentioned that PSA intends to produce SUVs for the Asean market and Proton currently does not have exposure to SUV segment.

“We note that demand for SUVs in Malaysia is strong, given the popularity of SUV models such as Honda HR-V, CR-V and Mazda CX-5. PSA’s entry is likely to make its’ products more attractive due to competitive pricing, as there will not be any import duties on cars originating from Asean

“The article reported that PSA appears more interested in acquiring a controlling stake in Proton, while Geely prefers to acquire Lotus (instead of DRB’s entire stake in Proton). 

“DRB stands to benefit from the proposed disposal or reduction in Proton stake, as it would no longer be required to consolidate Proton’s and Lotus’s losses in its group financial statements. Excluding Proton, we estimate that DRB would have reported RM467mil net profit in FY16, instead of RM992mil net loss,” said CIMB Research.