DRB-Hicom: Cheapest conglomerate
• Initiate coverage with a BUY rating and RM3.55 TP based on 20% discount to our SOP value.
• 3 core themes – i) Bargain valuations; ii) strong proxy to consumption story and iii) beefing up recurring income dsssss
• Wildcard is a potential privatization
(1) Under-researched multi-bagger in the making. DRB is a conglomerate with interests in automotive, property, banking, and services (waste management, national vehicle inspection, and O&M of power plants). It is the cheapest conglomerate in DBSV Malaysia universe. But with efforts to be more investor friendly now, we expect a significant rerating from its bargain basement valuation of 5.5x FY12 EPS and 0.6x FY12 BV on the back of 3-year EPS CAGR of 79%. Its balance sheet is also improving with 0.3x net gearing (excl. deposits/cash at Bank Muamalat). Recently, there are rumours of a privatization at RM2.20-RM2.70/share, which remains unsubstantiated.
(2) Proxy to consumption story. DRB’s automotive business has 20% share of TIV that is estimated to peak at 570,000 units in 2010. 1HFY11 profit from its automotive unit expanded 3.5-fold y-o-y driven by 12%-75% increases in sale volumes of all its marques. Besides being a key distributor for Proton, Honda, Mitsubishi, and Audi, it recently signed a MOU with VW to produce CKD units for possible distribution to ASEAN countries. This will be synergistic for its autoparts companies. Growth could be exponential going by YTD-Oct10 VW unit sales of 4,943, which is ahead of 2009’s 2,562 units. A key catalyst is the conversion of LOI from the Ministry of Defence for 257 AV 8x8 armoured wheeled vehicles worth c.RM8bn.
(3) Beefing up recurring services income. Pretax contribution from this unit grew 49% y-o-y in 1HFY11 led by Bank Muamalat, KLAS, and cash-cow concessions - Rangkai Positif, Puspakom and Alam Flora. Alam Flora will benefit from further privatization of the domestic waste industry, while Rangkai Positif should gain from more O&M works with the eventual expansion of Tanjung Bin by another 1,000MW. The eventual divestment of 30% of Bank Muamalat to Al Baraka Group will also enable the group to expand its footprint regionally. Based on 1.4x P/NTA, similar to Hong Leong Bank offer for EON Bank's assets, this could raise RM600m.