New Developments In DRB Hicom, Excite Analysis

Investors were treated to some exciting news from the media recently when it was announced that DRB-HICOM might be taken private by Tan Sri Syed Mokthar Al Bukhary, who controls some 55 percent of the company. Just a day later, DRB-HICOM’s managing director Datuk Seri Mohd Khamil Jamil said the group was surprised by the news like everyone else. He responded with this statement to the press:

“Let me clarify that there has been no indication on the group being privatised as alleged in the papers. For the time being, DRB-HICOM is in a state of rationalising Proton as well as its operations.”

The rumour began when sources reported to media that Tan Sri Syed Mokhtar planned to do so with the use if his privately-held Meridian Solutions Sdn Bhd. Meridian is controlled by his top financial man, Ooi Teik Huat. The 53 year old Ooi is a low profile but highly favoured aide of the billionaire, who sits on the board of Tan Sri Syed Mokhtar’s other controlled companies such as Malakoff and MMC Corp Bhd. There were also rumours that Hong Leong Bank Bhd and Public Bank Bhd were working with Ooi on the privatisation plan.

The same rumours also alleged that DRB-HICOM was in the midst of developing an “Asian Car” which will see Malaysia becoming a hub for the production of Volkswagen (VW) vehicles. One thing is for sure. There are developments in store, some of which will be realised. The fact that some of the rumours were discounted, but not the rest indicates that we should expect more announcements by the company in 2013, which analysts believe will be favourable to the company. RHB Research was certainly bullish about the prospects:

“Even if no offer materialises, we continue to be positive on the longer-term fundamentals of the stock,” said the research house.

Developments In DRB-HICOM
DRB-HICOM recently announced the internal restructuring of Proton’s distribution business to improve operational efficiency including cost-savings of about RM28million per annum. Its next step would likely be to franchise out more dealerships. Hwang DBS Vickers Research (HDBSVR) is also positive on the recent Collaboration Agreement between Proton and Honda to explore opportunities in the areas of technology enhancement, new product line up, and platform and facilities’ sharing. The other initiative for Proton will be to focus on exports and the launch of new models in segments which it has no presence (namely the A, D, MPV and SUV segments). Two immediate models in the pipeline are the Preve Hatchback and a global small car (which is yet to be confirmed). The purchase of Petronas’ engine technology and knowledge in the 2.0 range is likely to pave the way for a Proton Perdana replacement model in the D segment.

However the most critical issue that DRB-HICOM has to solve is Proton’s 3-year average sales growth, which has been steadily declining in recent years by some -1.5%. This compares with the rising market share of the number three seller, Toyota; which has been rising by some 9.5% during the same period. At the rate it has been declining, Proton looks set to lose its second position in the market to Toyota, soon. This has been mainly due to the rising prices of Proton’s cars and the more competitive pricing of Japanese cars that are assembled in Thailand and re-exported into Malaysia. Another issue is the perceived lower quality of Proton’s cars compared with the Japanese brands, such as Toyota.

Analysts however remain positive that Proton would be able to slowly, but surely improve the quality and affordability of Proton vehicles, and subsequently improve its brand. Off late, Proton vehicles are slowly gaining acceptance in markets like Thailand.

Valuations
Analysts believe that DRB-HICOM is expected to maintain its growth momentum in the automotive business as it is transforming into a more focused group with interest in three core areas; namely Proton, the defence segment and manufacturing & engineering. They are especially positive on Proton’s Collaboration Agreement with Honda as it will give confidence to investors that DRB-HICOM is committed to turn around Proton and it would enable Proton to grow as an OEM. Also, it will be able to utilise idle capacity in Tanjong Malim, and opportunities for platform-sharing with Honda to enable Proton to launch new models – such as the Proton Perdana replacement model, to fill the void in the D segment at a much lower cost. This may also aid Proton’s export initiative. HDBSNR values DRB-HICOM at RM8.1billion based on a sum-of-parts (SOP) methodology, or RM4.22 per share. Their TP is based on 20% holding company discount.

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