News

• DRB’s COO Datuk Seri Che Khalib has sounded warning bells that DRB could be adversely impacted if the problems plaguing its newly acquired Proton are not resolved.
• DRB is currently working on solutions for Proton, which will be announced sometime next month.
• Previously, DRB’s MD Datuk Seri Mohd Khamil had already indicated DRB is in discussions with potential foreign partners for Proton, which will improve Proton’s overall quality.
• At that time, the MD had also increase the sales target of Proton to 200k (from 167k) for its financial year ending March 2013.

Comments

• With such a strong statement, we are confident that DRB has already pre-planned the roadmap for Proton even before it acquired Proton in early 2012. Else, DRB would not have launched several rounds of bids to acquire Proton.
• We concur with DRB’s initiative on Proton to tap into foreign expertise to produce high quality and well accepted cars and achieving the “Asean Car” target. There is a need to rebrand Proton models and improve consumers’ perceptions on the national marque (which is always second to Perodua).
• DRB may take advantage of the group’s strong ties with VW Group (including Audi), Honda, Suzuki and Mercedes, and improve the national brand quality and perception.
• Furthermore, we expect DRB to extract synergies with Proton group, as DRB has large exposure in the automotive components and parts segment supporting Proton and the consolidating of DRB’s EON and Proton Edar Dealerships. DRB’s other division such as Bank Muamalat and Pos may provide support to Proton as well.

Risks

• Prolonged bank tightening measures on lending rules.
• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

• Unchanged.

Rating

BUY

• Positives
  • Acquiring Proton (restructuring of Proton), to turn DRB into a major integrated automotive player in the region.
  • Partnering VW group to set up regional hub in Malaysia.
  • Honda Malaysia to set up regional hub for Hybrid car.
  • Severely undervalued counter.
  • Deftech awards of RM7.55bn over 7 years.
  • Synergy of POS with DRB’s other business units.
• Negatives
  • Bank tightening financing measures.

Valuation

• Maintained Buy recommendation with unchanged Target Price of RM3.43.

Source: Hong Leong Investment Bank Research - 17 Oct 2012