DRB Hicom - Several proposals on the table for Proton's revival BUY

Stock Name: DRBHCOM
Company Name: DRB-HICOM BHD

Research House: AMMB

Price Call: BUY

Target Price: 4.00

We reaffirm our BUY rating on DRB-Hicom with our fair valueunchanged at RM4.00/share, pegging a 10% discount to our sum-of-parts value ofRM4.40/share.

It was reported in the press today that DRB is evaluatingplans by Mitsubishi, Volkswagen and General Motors (GM) to revive Proton.

GM has proposed to gain control of half of Proton'sproduction lines at the latter's plant in Tanjung Malim. This is not somethingnew as it was already speculated in the market earlier that GM plans to buy a50% stake in the plant. This proposal makes sense given the much-publicisedunder-utilised Tanjung Malim plant ' running at barely 50% utilisation. A valuationof RM800mil for the plant stake has been bandied about but the key point hereis that Proton would be able to achieve economies of scale. 

Mitsubishi, meanwhile, has put forward a proposal to utiliseProton's spare capacity to produce some 200,000 engines with a horse powerbetween 1,600cc and 2,000cc.

Not surprisingly, it seems DRB prefers to work withVolkswagen to produce B-segment cars. Apart from technology, DRB would be ableto leverage on Volkswagen's strong global distribution network to marketProton's car overseas. We are not ruling out equity participation by VW forthis exercise. 

Notwithstanding that, we believe DRB's immediate focus onProton would be very much on plugging the 'leakages' within the latter'soperation and we suspect, mostly in the rationalisation of parts supply. 

On the other hand, DRB has not decided whether to sell orkeep the loss-making Lotus, given that due diligence on the latter can only bedone once the MGO is completed. Having said that, the disposal of Lotus wouldbring an additional RM200mil-RM300mil income to Proton. 

We continue to like DRB, given it is one of the cheapestconglomerates ' trading at CY12 of 13x versus its peers of 18x. The group is onan exciting growth path, as it is the best proxy to VW's ambition to be a keyASEAN auto player. DRB would also benefit in the transformation of Pos Malaysia' recently showing strong a set of results ' and the next leg up would be toreap the synergies with its sister company, Bank Muamalat.

Source: AmeSecurities