CIMB Research retains Add for DRB-Hicom with higher target price

KUALA LUMPUR: CIMB Equities Research is maintaining its Add call for DRB-Hicom with a higher sum-of-parts based target price of RM2.25.

It said on Tuesday this was a 10% discount to the realised net asset value (RNAV) as it assigned higher valuations to the group’s defence and aviation (CTRM) divisions, as well as Pos Malaysia following the April surge in its share price. 

“Our Add call is supported by the imminent foreign strategic partner (FSP) for Proton. Key downside risks are no FSP for Proton and deterioration in Proton’s earnings,” it said.

CIMB Research visited DRB-Hicom’s automotive assembly plants, automotive university and defence vehicle assembly plant in Pekan, Pahang at end-April 2017, together with 30 buy-side analysts and fund managers. 
“The visit was an eye-opener, as we developed greater appreciation for DRB-Hicom’s automotive manufacturing and defence vehicle assembly capabilities, which contributed positive operating profit to the automotive division in FY16. 

“We were also encouraged to see DRB-Hicom expanding its automotive ecosystem, with the aim of transforming DHAC into a self-sustaining regional automotive centre with state-of-the-art technology,” it said.

The research house pointed out Hicom Automotive Manufacturers Malaysia (HAMM) that specialises in the assembly of foreign marques and commercial vehicles, recently completed the construction of a new RM230mil paint shop, which is expected to boost the production capacity for Volkswagen models from 25,000 to 50,000 units/year.

It also visited DRB-Hicom University of Automotive Malaysia (DHU) that aims to produce skilled workers for the automotive sector.

DHU was accorded university status in Oct 2015. It is equipped to deliver tertiary education and undertake research at an international level. It currently has more than 1,000 students registered in 34 programmes and has the capacity to accommodate up to 7,000 students. 

Management aims to add more programmes and faculty members to attract both local and international students.

“We ended our visit at DRB-Hicom Defence Technologies (Deftech) that carries out contract assembly of defence vehicles. 

Deftech was awarded a RM7.55bil contract in February 2011 to supply 257 units of AV-8 armoured wheeled vehicles to the Malaysian Army in 2014-2020. 

"We estimate Deftech has only completed c.26% of the AV-8 project at end-FY16 partly due to the tightening in the government’s defence budget allocation," it said.