Thursday, August 4, 2016

DRB-Hicom : Another attempt to sell The Verge BUY

DRB-Hicom : Another attempt to sell The Verge                BUY

DRB-Hicom announced yesterday that a wholly-owned indirect subsidiary has signed a non-binding term sheet to sell its entire 90% stake in Corwin Holding Pte Ltd to Singapore-listed Lum Chang Holdings Ltd. Corwin owns the eight-level shopping mall, The Verge, located in Singapore's Little India. The book value of the property as at March 31, 2016 was RM405.9mil - valuing DRB-Hicom's stake at RM365.3mil. Recall that DRB-Hicom had cancelled a plan to sell its interest in Corwin in early May 2016, as the intended purchaser (Evolutyon Real Estate Investment Holding Pte Ltd) had failed to fulfil its contractual obligations within the agreed completion date. Back then, the parties had entered into an initial agreement in Dec 2015 with a price of SGD317mil for Corwin, after including:-  Corwin's unaudited net assets of SGD56.1mil as at 30 November 2015, a net profit of SGD30.5mil in FYE March 31, 2015 and a value of SGD295.6mil for The Verge shopping mall (1.11x the book value of SGD140mil or RM426mil of the mall as at March 31, 2015).  The net gain to DRB-Hicom, after expenses and repayment of an SGD85mil loan by Corwin to Maybank, would have been SGD189mil or RM578mil.

Assuming DRB-Hicom's share of gross proceeds of RM861mil is used to pay off debt, we estimate the group's FY17F net gearing to reduce to 0.83x from 0.96x. We are positive on DRB-Hicom's efforts to unlock the value of its non-core assets and provide some relief to its balance sheet. However, we believe any share price appreciation from the news will quickly moderate given the persisting issues at Proton, which have led the market to factor in a steep discount to DRB-Hicom's assets. We retain our BUY call and fair value of RM1.50/share on DRB-Hicom. This is based on a P/B ratio of 0.44x - below its 10-year historical mean of and five-year mean of 0.6x. Our call is premised on the potential entry of a strategic foreign partner for Proton.

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