DRB-Hicom : DRB-Hicom says it will not sell 100% of Proton BUY

STOCK FOCUS OF THE DAY

DRB-Hicom : DRB-Hicom says it will not sell 100% of Proton           BUY

DRB-Hicom in an announcement to Bursa yesterday denied media reports suggesting that the company could dispose of its entire stake in Proton. DRB-Hicom said it remains committed to hold a "substantial and strategic" stake in Proton, and that it is currently assisting Proton with the turnaround programme. DRB-Hicom reiterated that the soft loan granted by the government requires it to seek a partner that is a "strategic, operational and cultural fit on a permanent basis" with the intention to grow its automotive business, and that this will be done by 1QFY17.

The bottom line from this latest development is that DRB-Hicom will still hold a substantial stake in Proton in the longer term and continue to be an active part of its reform. The entry of a foreign partner would significantly benefit Proton which has lagged behind in R&D and as a result sold cars that are compelled to compete primarily on price, instead of technology or design. However, we note that the entry of a foreign partner into Proton would only be gainful if it is paired with a move to directly address the long-term and structural issues in Proton. This would require significant political will. 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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