Strong growth potential in DRB-Hicom automotive division

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KUCHING: DRB-Hicom Bhd’s (DRB-Hicom) automotive division is seeing strong growth potential from several factors including Proton, its assembly contract with Volkswagen and earnings contribution from its AV8X8 contract.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in its research report, “The purchase of Proton has positioned DRB-Hicom as the country’s largest automotive group with a market share of 31 per cent for the first nine months of 2012.”

The research arm was positive on the group’s revival plan for the national marquee, which includes the increase of sales through introduction of new models, growing its exports, as well as turning around Lotus.

On the other hand, DRB-Hicom’s tie-up with Volkswagen was noted to have been progressing well as the production of the Volkswagen marquees was ‘well on track’.

“We also understand that earnings contributions from the RM7.5 billion AV8X8 contract will start coming in from financial year 2014 onwards. As such, all its growth ‘engines’ will be working overtime for the next two years,” Kenanga Research explained.

The research house noted that the automotive market correlated to the condition of the economy.

“As such, going forward, any slowdown in the economy, rise of oil prices and tightening of consumers’ purchasing power would negatively affect auto sales.”

DRB-Hicom’s property division would also be contributing to its future growth, according to Kenanga Research, who also pointed out that the group would kick-start its property projects in 2013 and 2014 in a move to put its massive land banks to good use.

Kenanga Research opined that this showcased the management’s serious commitment to transform the group’s assets into earnings and cash.

“The group has always had a large development land bank with the hot ones now being in Iskandar Malaysia in Johor and Glenmarie in Klang Valley,” the research house said, noting that new launched would have a total gross development value of RM323 million in 2013 before being ramped up to around RM11 billion and RM2 billion in 2014 and 2014 respectively.

As such, DRB-Hicom’s property earnings before interest and tax would jump from just RM6 million in financial year 2012 (FY12) to RM32 million in FY13 to RM85 million in FY14.

Volkwagen had also been looking to make Malaysia its manufacturing hub in Asean. “To do so, it was said to be mulling over the buyout of Proton’s Shah Alam plant for the additional capacity,” the research house added.

Apart from the possible land sale to Volkswagen, Kenanga Research believed that another possible scenario was to have DRB-Hicom transfer the land to the group’s property arm for redevelopment. It reckoned that such a move would also be lucrative considering the growing scarcity of prime land bank in the Klang Valley area.