Stock Name: DRBHCOM
Company Name: DRB-HICOM BHD
Research House: HWANGDBS
DRB-Hicom Bhd
(April 25, RM2.27)
Buy at RM2.30 with target price of RM3.80: DRB-Hicom will purchase Khazanah Nasional's 32.2% stake in Pos Malaysia for RM622.8 million or RM3.60 per share.
Of this, RM17.3 million or 10 sen per share is for 16 plots of land which will be rezoned for commercial use instead of the present postal service use. This will require an amendment to the Federal Land Commissioner's Act by Dec 31, or 10 sen per share would be refunded. The price tag seems fair for a controlling stake, and values Pos at 14 times FY11 earnings per share (EPS) and 2.3 times book value (BV), consensus data, and a discount to the regional sector average of 15 times. The expected completion of the sale is by 2QCY11. There is unlikely to be a general offer for the rest of the shares in Pos.
Assuming the deal is 70% financed by debt at 7% interest per year, and we use consensus earnings, the acquisition would enhance DRB-Hicom's FY12F and FY13F earnings by 2% and 2.4% respectively. And we expect gearing to rise to 0.25 times in FY12F against 0.16 times currently. There may not be immediate earnings impact, but it is a good acquisition because: (i) there will be synergies between Pos' distribution network and DRB-Hicom's 70%-owned Bank Muamalat, enabling a divestment of DRB-Hicom's 30% beyond our valuation of 1.1 times BV; (ii) its longer-term return-on-equity enhancing (Pos' 2010 ROE was 12.5% against DRB-Hicom's 10.8%) and would enable it to further strengthen services earnings and diversify out of its more cyclical motor business; and (iii) the likely amendment of the Federal Land Act will enable Pos to encash value from its valuable landbank, which is not captured in consensus numbers.
We expect the acquisition to be sum-of-parts neutral for now, but it could be SOP accretive once Pos unlocks value from its land. Moreover, the overall higher group services earnings (50% in FY13F versus 48% currently) will support price-earnings ratio expansion to reflect DRB-Hicom's true intrinsic value as a growing conglomerate. We value DRB-Hicom at RM3.80, implying a PER of 12.1 times FY12F EPS and 1.3 times BV against current valuations of 7.3 times and 0.8 times. ' HwangDBS Vickers Research, April 25
This article appeared in The Edge Financial Daily, April 26, 2011.
Company Name: DRB-HICOM BHD
Research House: HWANGDBS
DRB-Hicom Bhd
(April 25, RM2.27)
Buy at RM2.30 with target price of RM3.80: DRB-Hicom will purchase Khazanah Nasional's 32.2% stake in Pos Malaysia for RM622.8 million or RM3.60 per share.
Of this, RM17.3 million or 10 sen per share is for 16 plots of land which will be rezoned for commercial use instead of the present postal service use. This will require an amendment to the Federal Land Commissioner's Act by Dec 31, or 10 sen per share would be refunded. The price tag seems fair for a controlling stake, and values Pos at 14 times FY11 earnings per share (EPS) and 2.3 times book value (BV), consensus data, and a discount to the regional sector average of 15 times. The expected completion of the sale is by 2QCY11. There is unlikely to be a general offer for the rest of the shares in Pos.
Assuming the deal is 70% financed by debt at 7% interest per year, and we use consensus earnings, the acquisition would enhance DRB-Hicom's FY12F and FY13F earnings by 2% and 2.4% respectively. And we expect gearing to rise to 0.25 times in FY12F against 0.16 times currently. There may not be immediate earnings impact, but it is a good acquisition because: (i) there will be synergies between Pos' distribution network and DRB-Hicom's 70%-owned Bank Muamalat, enabling a divestment of DRB-Hicom's 30% beyond our valuation of 1.1 times BV; (ii) its longer-term return-on-equity enhancing (Pos' 2010 ROE was 12.5% against DRB-Hicom's 10.8%) and would enable it to further strengthen services earnings and diversify out of its more cyclical motor business; and (iii) the likely amendment of the Federal Land Act will enable Pos to encash value from its valuable landbank, which is not captured in consensus numbers.
We expect the acquisition to be sum-of-parts neutral for now, but it could be SOP accretive once Pos unlocks value from its land. Moreover, the overall higher group services earnings (50% in FY13F versus 48% currently) will support price-earnings ratio expansion to reflect DRB-Hicom's true intrinsic value as a growing conglomerate. We value DRB-Hicom at RM3.80, implying a PER of 12.1 times FY12F EPS and 1.3 times BV against current valuations of 7.3 times and 0.8 times. ' HwangDBS Vickers Research, April 25
This article appeared in The Edge Financial Daily, April 26, 2011.
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