A property play in the making at DRB-Hicom?

PETALING JAYA: Amid all the buzz about the Automotive High-Tech Valley (AHTV) in Tanjong Malim, Perak, one interesting aspect of the development is that DRB-Hicom Bhd will end up with a valuable piece of land in Shah Alam, Selangor.

This is because it intends to fully relocate the manufacturing facilities of Proton Holdings Bhd to Tanjong Malim by 2026.

Currently, the group’s 50.1%-owned Proton produces five models in its more technologically-advanced Tanjong Malim plant. Another two models are produced in its Shah Alam facility, which sits on 250 acres of land.

That would mean that the large tract of land in Shah Alam will be free for DRB-Hicom to extract more value out of it when the shift to Tanjong Malim is completed.

With industrial land in good locations highly sought after, there is a lot of potential that can be realised or unlocked, according to former investment banker and private investor Ian Yoong.

“Large tracts of land in Shah Alam are scarce; DRB-Hicom is sitting on a gold mine,” says Yoong, adding that industrial land in Shah Alam is valued at RM90-RM180 per sq ft (psf), depending on the location.

Taking the low end of RM90 psf, this translates to a value of RM981mil or about one-third of the stock’s market capitalisation of RM2.94bil.

Within the vicinity of Proton’s Shah Alam plant, which began operation in 1985 and rolled out the first ever Proton Saga then, are other property developments.

If DRB-Hicom wants to dispose of some parcels of the land bank, there should not be a lack of potential buyers, say analysts.

Alternatively, it can undertake a mixed development of the real estate, which will be positive, considering the potentially higher value that can be extracted where monies could go to pare down debt or fund Proton’s plans going forward.

Property development is already part of the group’s business where it has undertaken the development of various residential, commercial, hospitality and industrial projects, including Tanjong Malim’s Proton City township.

Yoong notes that DRB-Hicom has been trading at low earning multiples, and a “property play” could be a re-rating catalyst for the stock.

Back to AHTV, DRB-Hicom had early this month signed a heads of agreement with partner, Zhejiang Geely Holdings Group of China, to undertake the development and commercialisation of the parcels of land in Tanjong Malim into a prominent automotive industry centre and Malaysia’s next-generation vehicle hub.

The estimated value of total investments for AHTV over the next 10-12 years is RM32bil from various parties, including vendors and potential investors – both foreign and local.

PublicInvest Research in an April 10 report says it is positive over this development, as the involvement of Geely (which has a 49.9% stake in Proton, and also owns Sweden’s Volvo cars) is a boost for AHTV as the Chinese automaker is known for its strength in technology and mobility ecosystems.

“This can be an impetus for Malaysia in the new automotive technology space, with the inclusion of multiple global investors auguring well for the local automotive landscape,” says PublicInvest, which retains an “outperform” call on the stock with an unchanged target price of RM2.10.

Notably, DRB-Hicom had returned to the black in the financial year ended Dec 31, 2022 (FY22) with a RM274mil net profit against RM74mil net loss in FY21.

The group attributed the stronger earnings to the turnaround in profitability at Proton and auto components divisions, plus higher profit contribution from automotive distribution and defence segment following the delivery of the remaining 26 units of AV8 armoured vehicles.

For the year, the group’s 53.5%-owned Pos Malaysia Bhd had also narrowed its losses. According to Hong Leong Investment Bank (HLIB) Research, the company’s management remained cautious on Pos Malaysia’s turnaround in the near term although major cost issues have been streamlined over the years.Another subsidiary that is expected to remain subdued in the near-term is DRB-Hicom Defence Technologies Sdn Bhd (Deftech), following the delivery of final units of AV8 in late 2022.

Pending new major contract awards, the research firm says contribution from Deftech will slowdown in FY23.

On the other hand, HLIB Research expects Proton to continue its growth momentum in 2023, while DRB-Hicom’s other franchises, namely, Honda and Mitsubishi, to also sustain their performance.

The research firm notes that since Proton’s restructuring exercise in 2017, the automaker has been achieving yearly sales growth, driven by increasing demand for its models especially for its new X-series sport utility vehicles or SUVs.

For 2023, it says Proton is targeting sales of 147,000 units, with potential upsides, while current backlog stood at 60,000 units.

“Proton has guided three new model launches this year, which will include a mild hybrid variant.

“Management also guided margins to remain stable in FY23, while for the export market, management is targeting 10,000 units (versus the 5,000 units achieved in FY22),” HLIB Research says in its report.

According to the research firm, the company’s management remains confident of Proton’s 10-year turnaround plan to become the leading marque in Malaysia and top three in the Asean region.

Meanwhile, Honda is targeting sales of 80,00 units in FY23, to be supported by new model launches. Similarly, both Mitsubishi and Isuzu also received strong demand and expected to sustain performance in 2023, says HLIB Research.

Subsidiary Composite Technology Research Malaysia (CTRM) Sdn Bhd will also continue to ride on the recovery of the aviation sector. DRB-Hicom also has a presence in banking via 70%-owned Bank Muamalat.

In the fourth quarter of FY22, the bank was affected by fair value loss on one of its investments. In FY23, HLIB Research says management expects the bank’s earnings to normalise again and ride on the interest rate hikes.

Its ongoing Media City project, which is the revamped Angkasapuri as a modern destination for technology, innovation and creativity, is targeted for completion by mid-2023.

Late last year, a foreign news agency reported that DRB-Hicom could potentially be privatised by its major shareholder, Tan Sri Syed Mokhtar Albukhary, who owns a 56% stake in the group via Etika Strategi Sdn Bhd.

In 2018, DRB-Hicom sold its entire stake in Alam Flora Sdn Bhd to Malakoff Corp Bhd, which is also majority owned by the tycoon, for RM944.6mil. The Shah Alam land, according to some, could add more fuel to the privatisation talk, as cash of about RM1bil could be used in a selective capital reduction to facilitate the exercise.

Assuming a 20% premium to the current market price, this works out to RM1.56bil to buy out the remaining 45% stake the tycoon does not own.

Based on a sum-of-the-parts valuation, Bank Muamalat is valued at about RM1.5bil according to one analyst. Disposing part of a stake in the bank could raise the rest of the money for any potential buyout, says the analyst. - GURMEET KAUR