DRB HICOM

By Selvatore Dali




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.



New Chairman - DRB-HICOM Berhad announced that Datuk Syed Mohamad Syed Murtaza has been appointed as its new chairman effective July 1, 2009. In a statement, DRB-HICOM said Syed Mohamad will succeed Tan Sri Syed Zainol Anwar Syed Putra Jamalullail. Syed Mohamad, 61, was appointed to the board on Oct 28, 2005, as an independent non-executive director. He is currently chairman of Hunza Consolidated Berhad, managing director of Armstrong Auto Parts Sdn Bhd, and director of Yayasan Bumiputra Pulau Pinang Berhad, Boon Siew Credit Berhad, Tourism Entrepreneur Centre Berhad and PBA Holdings Berhad. In addition, he is also president of the Federation of Asian Motorcycle Industries and steering committee of the International Motorcycle Manufacturers Association.



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 RM1.14bn??? 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. Do you think DRB-Hicom will stay at RM1bn market cap if it starts to get those "type of projects" mentioned above? It is not too far fetched for DRB-Hicom to be valued at RM2bn or RM3bn if it becomes the main "defence vehicle".



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.



Share Price: RM1.13

Shares: 1.007bn

Market Capitalisation: RM1.14bn