Tuesday, December 07, 2010

What's In Store For DRB Hicom?

Ask any analyst, dealer or remisier what is under DRB Hicom, I bet you 99.99% will only be able to say they are in auto distribution, some property... and thats it! Nobody seems to know what the hell is DRB Hicom. No research house wanted to cover the stock because that would be like covering 20 companies for one analyst. Thats the peril of being a conglomerate, no research report, how the hell will foreign funds justify holding the stock.

There are plenty of big companies with lots of business units, stocks like Samsung and BHP gets covered but by one analyst per firm - what that means is that all that analyst do is cover that one stock all his career. I don't think any research firm, local or foreign is willing to do that.

There are a lot of whispers and rumours over DRB Hicom over the past few days and volume has suggested something extraordinary in store for the stock.



I posted about DRB Hicom more than a year ago:

Volkswagen AG - DRB-Hicom is believed to be in talks with Volkswagen AG to carry out the assembly of CKD (completely knocked down) VW models at its plant in Pekan, Pahang. Sources said that DRB-Hicom wants to locally assemble VW cars with plans to eventually carry CKD Operations for the Audi brand there as well. However, it is understood that sales of the Audi brand in Malaysia have yet to reach a scale that would make CKD operations for the marque financially viable in the country at the moment. Sources continued that DRB wants to begin with assembly of VW first as the German carmaker has been looking to tap the Asean market where its presence is relatively small.

Double Tracking Project
- DRB Hicom has submitted a proposal to construct a double track railway line from Gemas to Johor Baru spanning 250km, sources say. This proposal, which could be valued as much as RM8bn, will rival a bid by privately held Global Rail SB that is teaming up with a Chinese consortium. The Edge understands that DRB Hicom would end up working with MMC Corp, as the cargo carried on the railway track would ultimately pass through PTP.


Defence Hub - Malaysia will be made a hub for the production of defence equipment and parts to be used for the development of the regional defence industry, Defence Minister Datuk Seri Ahmad Zahid Hamidi said. "For this purpose, we will have to take several proactive measures with the cooperation of Asean countries to develop the industry in this region," he said to reporters after launching the 12th Defence Services Asia Exhibition and Conference 2010 (DSA 2010) . However, this will be only an arrangement of cooperation and not involve a defence agreement like the North Atlantic Treaty Organization (NATO). "We have had meetings with several defence industry players in Asean where they are ready to exchange products and equipment with our country," he said. Indeed the region can opt for specialisation of specific defence product and need not compete against its own Asean member country. "Indonesia is good in manufacturing some military materials that are being used by the United Nations and NATO countries as well. We should have an exchange programme where we could provide the MRO (Maintenance, Repair and Overhaul) here and we take part of their products produced in their country to be used by our armed forces," he said. Malaysia also has several defence equipment in the market whereby a local telecommunication company, with the cooperation of a foreign company, has already produced a defence communication equipment being sold in the region. Ahmad Zahid also said the region need not only be a user market, or a dumping ground for outdated defence equipment. He said several producers from Europe and the US have also agreed to make Malaysia the base for the marketing of their products and were also ready to provide technology transfer. "A meeting was held in Paris last week and this is good development," he said. "I will be discussing this with my counterparts in Asean where I will seek for cooperation so that we are able to develop this region as a producer of defence equipment," he said. With continued efforts, Ahmad Zahid said he was confident that during DSA 2012, 30 percent of defence equipment and parts will be exhibited by local producers. "I also expect not less than 10 percent participation from local players for DSA 2010," he said. Among the companies to participate in DSA 2010 will be AMP Corporation, DRB Hicom, Defence Technologies, Nadi Defence, Composite Technology Research Malaysia (CTRM), SME Ordinance, Tri Level Miltech, System Consultancy Services, Bry Air Industries, WIRA WEB, MFDM Group and WESTSTAR LDV. "Despite an economy that is not favouring the defence and security industry, the participation is still high," he said. In fact, Malaysia should take the opportunity where in 2016 the defence sector expenditure in Asia is expected to rise to 32 percent or US$480 billion of the global defence expenditure.

Financials
- DRB-HICOM BHD registered a higher revenue of RM6.10 billion for the financial year ended March 31, 2009 as compared to RM4.01 billion previously. The company recorded higher pre-tax profit of RM774.94 million from RM376.07 million previously.

Pre-tax profit of RM774.94m with a market capitalisation of RM2.3bn??? I like the company as it has the base, the platform and infrastructure to do "a lot of things" (as hinted above). Its way way too cheap at RM1.13. I don't even have a fair value target for DRB-Hicom as it is a moving target, it depends on "when and what" projects will fall to DRB-Hicom. Even if NOTHING eventuates, the company can carry on the way it has and still be considered as "cheap". I rate this a buy and hold kind of stock. I can target RM1.50 over 3 months or even RM1.70 over 12 months if some of the things mentioned above were to eventuate.

It is pointless to even attempt a fair value as there is no benchmark for such a company that is being restructured to be elevated to the next level.

Research houses should seriously consider covering the stock now. I like the stock also as I can see strategic accumulation by serious parties, and the fact that Khazanah still holds a strategic stakes and it looks ripe for some serious "projects in store" for DRB-Hicom to elevate it to the next level. There are no serious contender to rank as a defence-heavy industry-automotive vehicle in our country.

That was then, this is now, need to re-evaluate.Shares: 1.933bn

What DRB Hicom have under their hood (I have highlighted the important ones):

Automotive
100.00% Automotive Corporation (Malaysia) Sdn. Bhd.
100.00% Defence Services Sdn. Bhd.
100.00% DRB-HICOM Auto Solutions Sdn. Bhd.
100.00% DRB-HICOM Defence Technologies Sdn. Bhd.
100.00% HICOM Diecastings Sdn. Bhd.
100.00% USF-HICOM (Malaysia) Sdn. Bhd.
93.00% HICOM Automotive Manufacturers (Malaysia) Sdn. Bhd.
79.05% Edaran Otomobil Nasional Berhad
79.05% Euromobil Sdn. Bhd.
70.00% Motosikal Dan Enjin Nasional Sdn. Bhd.
70.00% Edaran Modenas Sdn. Bhd.
70.00% Oriental Summit Industries Sdn. Bhd.
62.50% P HN Industry Sdn. Bhd.
51.00% HICOM-Teck See Manufacturing Malaysia Sdn. Bhd.
50.99% HICOM Automotive Plastics (Thailand) Ltd.
49.00% Isuzu Malaysia Sdn. Bhd.
48.00% HICOM-HONDA Manufacturing Malaysia Sdn. Bhd.
45.00% HICOM-YAMAHA Manufacturing Malaysia Sdn. Bhd.
37.94% Mitsubishi Motors Malaysia Sdn. Bhd.
36.62% Proton Parts Centre Sdn. Bhd.
49.00% ISUZU HICOM Malaysia Sdn. Bhd.
40.00% Suzuki Malaysia Automobile Sdn. Bhd.
34.00% Honda Malaysia Sdn. Bhd.
30.00% ZF Steerings (Malaysia) Sdn. Bhd.
29.00% Suzuki Motorcycle Malaysia Sdn. Bhd.
23.72% Johnson Controls Automotive Holding (M) Sdn. Bhd.
20.00% TRW Steering and Suspension (Malaysia) Sdn. Bhd.

Services
100.00% Rangkai Positif Sdn. Bhd.
100.00% PUSPAKOM Sdn. Bhd.
100.00% KL Airport Services Sdn. Bhd.
100.00% HICOM University College Sdn. Bhd.
70.00% Bank Muamalat Malaysia Berhad
70.00% Scott & English (Malaysia) Sdn. Bhd.
60.53% Alam Flora Sdn. Bhd.
51.00% Uni.Asia Life Assurance Berhad
34.73% Uni.Asia General Insurance Berhad
40.00% Midea Scott & English Electronics Sdn. Bhd.

Properties
100.00% Glenmarie Properties Sdn. Bhd.
(formerly known as HICOM Properties Sdn. Bhd.)
100.00% HICOM Builders Sdn. Bhd.
100.00% HICOM Facility Management Berhad
100.00% HICOM Indungan Sdn. Bhd.
100.00% HICOM Berhad
100.00% Kenyir Splendour Berhad
92.46% HICOM Megah Sdn. Bhd.
89.50% Glenmarie Cove Development Sdn. Bhd.
70.60% Horsedale Development Berhad
70.00% Comtrac Sdn. Bhd.
60.00% Proton City Development Corporation Sdn. Bhd.
60.00% Rebak Island Marina Berhad
35.30% HICOM-Gamuda Development Sdn. Bhd.
22.25% Niro Ceramic (M) Sdn. Bhd.

News article: "DRB-HICOM Bhd plans to improve the balance of revenue contribution from its services, automotive and property businesses over the next five years as it seeks to expand. Currently, its motor vehicle business makes up some 57 per cent of revenue, followed by its banking, insurance and power plant maintenance services at about 40 per cent. Property makes up less than 2 per cent of revenue now, but DRB-HICOM wants to boost this to 20 per cent in five years."

Recently, the company's second quarter saw net profit jumped from RM54.3m last year to RM155m. Consequently, net profit for the recent reported 6 months came to RM355.2m against RM114.8m same period last year. EPS rose to 15 sen for the 6 month period.

Catalyst #1 VW Tie Up: Conglomerate DRB-Hicom Bhd aims to conclude the joint venture plan with Volkswagen this month.

"We still need to tie up certain matters like product costing, commercial terms and investment with Volkswagen," its group managing director Datuk Seri Mohd Khamil Jamil said.

With the current capacity 60,000 per year, DRB-Hicom's automobile division plans to have a deal to hold the regional distribution and also focus on getting a deal for the hybrid and electric cars with Volkswagen. The division contributed 57 per cent to total revenue in the previous financial year. Volkwagen officials were impressed that DRB-HICOM’s automotive complex in Pekan, which sees the assembly and manufacture of Suzuki and Isuzu vehicles, was assembling Mercedes vehicles. Sources said the fact that the flagship S-Class was being assembled at the plant was testimony to the calibre of the plant’s suitability to assemble other types of vehicles.

A proper tie up would push DRB-Hicom to the next level as a significant auto regional hub player. You add that to the rest of the automotive units, you have a very attractive company unit on its own.

Catalyst #2 POS Malaysia: Although DRB-Hicom is just one of a few final bidders for Pos Malaysia, it is not a stretch to say that the links are stronger for DRB Hicom to secure the prized asset. Decision soon.

Catalyst #3 Defence Contracts: Big defence contracts supposedly coming from the Malaysian government and also from Hungary.

Catalyst #4 Assets Rationalisation: Under DRB Hicom there a few attractive assets that could sold or spun off: Alam Flora, Uni Asia and Bank Mualamat.

However, based on my thinking, I believe a privatisation is the smartest choice for the company, in fact the only sensible way to unlock values going forward. The company have reached a crossroad if the tie up with VW is a done deal. It will be a significant contributor to the bottom line from 2012 onwards. However you cannot list the automotive unit on its own because it now represents a majority of of its revenue, and possibly profits as well. The best way is to privatise it NOW, then list the automotive unit in 2013 ~ I think the listing itself will probably more than pay for the entire privatisation exercise, which would mean that the owner will get the rest of the assets for free.

The first 4 catalysts are all just temporary in nature to the share price. Soon after, the stock will suffer the fact that its still an unwieldy conglomerate and share price would not reflect the company's true worth. That is why a privatisation is the smartest and only way to go.

The company made RM355m net profit for the last reported 6 months or RM710m annualised. The company at RM1.53 is valued at RM2.95bn or just 4x current year earnings. Its NTA is above RM2.40. Banks will be lining up to lend RM2bn to the owner for him to do the privatisation as it is backed by the assets (2.40 x 1.933bn = RM4.63bn).

Assuming a 40% free float = 0.4 x 1.933bn x 2.10 = RM1.61bn, it would cost only RM1.61bn if a G.O. is done at RM2.10. If its done at RM2.40 = 0.4 x 1.933 x 2.4 = RM1.84bn. Even if he has to make a high bid of RM2.70 = 0.4 x 1.933 x 2.7 = RM2.07bn, it is still a great deal all around.

Right now your automotive earnings are rated 4x by the markets. Together with the Pekan assembly plant plus VW's involvement, the entire unit could easily fetch double that in an IPO, which would easily pay down whatever debts you have.

Borrowing RM2bn and say servicing it at 4% = RM80m a year is a cinch looking at the free cash flow, even locking in the capital investment required for Pekan plant. The owner could also off load Uni Asia (given such good valuations being struck now for insurance companies) and/or Bank Mualamat to also help pay down the debt.

Sometimes we are uncertain about a stock when we know the owner behind it and yet we don't really know him. In DRB Hicom's case, some may wonder whether he is a really good CEO/strategist or just a savvy dealmaker or both. Some may still be wondering how he got so rich, which may explain most having an indifferent or ambivalent attitude towards him. To be fair, let's just look at bare facts. DRB Hicom's revenue has risen steadily from RM2.9bn to RM6.3bn from 2007-2010. Gearing has been trimmed from 0.87x to 0.33x. PBT has gone from RM187m to RM657m. All this has been done without a significant jump in issued shares.

Is there a target price? Silly to have one. Because we don't know IF he would do it. The assuring thing is that EVEN if he does not, you are not buying into a terribly expensively valued company.

If this posting was written when DRB Hicom shares DID NOT see such a significant rise in volume, you can write it off as a long term hold paper. Usually whenever DRB Hicom jumped in volume traded, it is also not highly significant. However, the last two days volume seem to indicate a highly abnormal jump. You do your own conclusions.


Judging from my strategic views, it would be extremely silly for him not to privatise the company. So, our bet is on whether he is a silly man.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

4 comments:

Wall Street KLCI said...

Hi Dali,
I think the market may have given too much discount to DRB HICOM. I personally think that this Company is worth RM1.80 based on 30% discount to Automotive Historical PER.
My further analysis can be found here
http://wallstreetklci.blogspot.com/2010/11/drb-hicom-2q-earnings-up-114-to-rm132m.html

solomon said...

My bet is on it's financial arm, likely a sell off and creation of mega bank. The centre point could be rhb bank and osk. Privitisation is not unlikely but something from the common owners need to be listed first before this is possible eg malakof.

Musical chair now on financial and commodity stocks?

James said...

gHi Dali,

This is a masterpiece. Thanks for sharing with us.

James

Bappy said...

Dali,

A very conprehensive write up you have, for technical analysis of DRBHCOM you may want to have a look at http://spot4value.com/?p=1008