CIMB Research retains Add for DRB-Hicom, target price RM2.90

KUALA LUMPUR: CIMB Equities Research is retaining its Add with a sum-of-parts based target price of RM2.90 for DRB-Hicom following its corporate exercise to dispose of non-industrial property assets. 

It said on Friday the narrowing losses by its car manufacturing operations under Proton, strengthening of the ringgit against US$ and higher net profit contribution from the services division are potential re-rating catalysts. 

“Meanwhile, key downside risks to our call are widening losses at Proton and weaker contribution from the services division,” it said.

DRB-Hicom is selling 10 property assets with an estimated land size of 2,268 acres held by several subsidiaries for a total consideration of RM1.4bn. 

It also plans to dispose of a 70.6% equity interest in Horsedale Development Bhd (HDB) for RM331.8m. HDB owns a number of property assets situated within Glenmarie, Shah Alam, comprising residential land, Holiday Inn Hotel Glenmarie and Glenmarie Golf & Country Club. 

It also selling the 100% stake in Rebak Island Marina Berhad (RIMB) for RM170.4m. RIMB owns the Rebak Island Resort, commercial building and undeveloped land located within Pulau Rebak Besar in Langkawi, Kedah. 

CIMB Research said these assets will be sold to Prisma Dimensi Sdn Bhd (PDSB), a private limited company held by DRB’s major shareholder, Tan Sri Syed Mokhtar Syed Nor. 

PDSB will complete the deal through land swap of 1,243.5 acres of freehold land in Johor Bahru (Johor Land) with an estimated value of RM1.65bn and cash payment of RM289m for the remaining balance. The group expects the deal to be completed in 1QCY19.   

“Management believes the proposed disposal will allow the group to unlock the value of its non-core property assets and stay focused on developing the remaining landbank into industrial parks. 

The group currently has about 600 acres of landbank to be developed for industrial parks, which are located in Tanjung Malim, Perak, Shah Alam, Selangor, Bukit Kayu Hitam Kedah and Alor Gajah, Melaka. Post-disposal, DRB’s prospective industrial landbank will increase to 1,843 acres, or by 270%.  

“DRB-Hicom intends to develop the Johor Land into a modern industrial zone park as the group expects demand for industrial land in Johor, especially by Singaporean investors, to pick up due to shortages of industrial space in Singapore. 

“DRB-Hicom plans to build a modern industrial park consisting of terrace factories, semidetached factories and purpose-built detached factory components, as well as ancillary use such as commercial development, worker hostel complex and community facilities with estimated gross development value of RM4.3bn. The development is expected to commence in 2020 with a total development period of 10 years. 

“The proposed disposals are expected to result in a net gain on disposal of RM849m after taking into account the deferred tax and expenses related to the proposed disposals. 

Based on the proforma effects of the proposed disposals, DRB-Hicom’s net asset per share should increase by 12% from 3.65/share to RM4.09/share. 

“Meanwhile, the group’s gearing is also expected to fall from 50% to 44%.   Maintain Add and RM2.90 target price,” it said.

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