Dec 6, 2011

Buy – DRBHcom Interested in a stake in Proton?

DRB-Hicom: Buy; RM2.20 Price Target: RM3.45; Stock code 1619

Market is rife with rumours that DRB-HICOM (DRB) is keen to acquire Khazanah’s 42.7% stake in Proton. We understand other parties which may be interested are Naza and Sime Darby. The EdgeFinancialDaily today reported that Tan Sri Syed Mokthar AL-Bukhary is believed to be in
negotiations with Maybank Investment Bank to facilitate a deal to take control of Proton. It is believed that if there are no parties prepared to acquire Khazanah’s 42.7% stake, it may choose to sell a stake of less than 33% to avoid the bidder having to make a MGO. 

It is a known fact that DRB in 2009 had submitted a bid to acquire a 32% stake in Proton but the deal fell through. We spoke to management on this and their view is that there is nothing to substantiate this rumour. However, it believes the jewel in Proton lies in its state-of-the-art Tanjong Malim plant which is strategically located. While there are also other synergies such as spillover for DRB’s autoparts business and DRB also has a 60:40 JV with Proton to develop 4,000 acres of land surrounding Proton’sTanjong Malim plant (Proton City), we believe these are longer term positives.

Also, DRB is also in the midst of expanding its Pekan plant to cater for the presence of VW and potentially Audi. There are immediate goals for VW’s production in Pekan to ramp up to 50,000 units by 2016 for export to the Asean market. In the longer term, DRB with its slew of established
relationships with motor giants such as VW, Honda, Suzuki, Isuzu and Mercedes may be an ideal platform to bring in more foreign partners to work with should the acquisition take place. 

Hence, the key would be pricing where on the surface it may not work to DRB’s benefit. At current price, Proton trades 23x FY13F PE (Y/E March) and 0.59x NTA. This compares to DRB which trades 7.5x FY13F PE (Y/E March) and 0.8x NTA.

All in, we would be sceptical if the key motive for acquisition of Proton is just capacity expansion. Its Pekan plant is running on 40-45k units per annum vs potential capacity of 95k p.a. We reaffirm our BUY rating and TP of RM3.45 based on a 20% discount to our SOP value. As it stands, we think DRB’svalue proposition is already strong with a growing presence in automotive, services and property. 

by HwangDBS Vickers