DRB-Hicom : Confirmation of shortlist for Proton down to 3 BUY

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DRB-Hicom : Confirmation of shortlist for Proton down to 3         BUY

Deputy Minister of International Trade and Industry Datuk Ahmad Maslan confirmed in parliament that DRB-Hicom now had a shortlist of 3 candidates in the search for a foreign strategic partner for Proton, the media reported. The statement confirms the news of a final shortlist for Proton, as reported by The Edge Weekly earlier this month. Recall that the newspaper had named Groupe PSA (maker of Peugeot and Citroen cars), Renault SA and China's Geely Automobile Holdings Ltd as the final picks. Proton sales for Jul-Sept continued the downtrend owing to the late entry of new models. However, we expect sales to improve following the recent launches and close around 75K-80K for the year (from 50K in 9MFY16), counting especially on a boost from the Persona and Saga. Furthermore, the rebadged Suzuki Ertiga (to launch by end-November) will serve to revive MPV sales for Proton. The 1.4L compact MPV would be an alternative to the 1.6L Proton Exora MPV (RM67K-RM83K), which is currently the only Proton model that is not a sedan or hatchback. The Exora saw 13K-15K in annual sales for the previous two years, implying a captive market of 1K-1.3K/month for a Proton MPV. We believe Proton would try to outdo this by positioning the Ertiga against the Perodua Alza. The 1.5L Perodua Alza compact MPV is priced at RM52-RM65K and sales have proven to be resilient, declining 8% YoY to 26K for 9MFY16 (an average of ~3K/month).

We maintain our BUY call on DRB-Hicom with a fair value of RM1.80/share This is based on a P/B ratio of 0.53x, below its 10-year historical mean and five-year mean of 0.6x. Our FV is a 40% discount to our SOP of RM3.10 for DRB-Hicom; and we believe the entry of a foreign strategic partner into Proton could narrow this difference. We are positive on the following factors for DRB-Hicom: (1) the potential entry of a strategic foreign partner (2) steady earnings from the RM7.55bil AV8 contract for which contributions are expected to peak FY17-FY19 (3) the ongoing move to dispose of non-core assets to relieve the balance sheet (4) the disposal of KLAS as part of its restructuring involving POS Malaysia, which is poised to be a complete player in the logistics supply chain.

Others :

YTL Power : A  mild improvement in 1Q17             HOLD

Petronas Gas : Value-erosion from upcoming IBR implementation            SELL

ECONOMIC HIGHLIGHTS

US : Acceleration in inflation rate and housing starts

Philippines : Full year growth expected to settle within official target Indonesia

Indonesia : BI maintained policy rate

Euro : Inflation remains weak

NEWS HIGHLIGHTS

Property Sector : E & O to launch RM205mil properties in Penang soon

Engineering Sector : Bintai Kinden to acquire Optimal for RM15mil

Telco Sector : Telecoms company OCK forms another company in Myanmar