DRB-Hicom’s earnings stand strong

by SHAHEERA AZNAM SHAH / pic by TMR FILE

DRB-HICOM Bhd is expected to deliver a stronger net profit in its third quarter of 2020, backed by higher sales volume from Proton Holdings Bhd and an increase in parcel process volume by Pos Malaysia Bhd, underpinned by robust e-commerce demand, according to CGS-CIMB Securities Sdn Bhd.

The broker expects a minimal impact on DRB-Hicom’s earnings from the proposed acquisition of Tradewinds Plantation Bhd’s agricultural land parcel in Alor Gajah, Melaka, for RM240 million last week.

“We see higher than expected volume growth at Proton and faster than expected earnings turnaround at Pos Malaysia as potential re-rating catalysts for the stock.

“Widening Pos Malaysia losses, lower volume delivery at Proton and supply chain disruption from the Covid-19 outbreak are downside risks,” CGS-CIMB said in a research note yesterday.

CGS-CIMB added that the proposed land deal is aligned with DRB-Hicom’s strategic direction and its focus on the development and sale of industrial properties following the decision to exit the non-industrial property asset and hospitality portfolio in 2018.

The group’s newly acquired land parcels are strategically located with easy access to the North-South Expressway and 6km east from its existing Hicom Pegoh Industrial Park, Melaka, with development expected to commence in 2022.

“In the meantime, the group plans to obtain potential recurring income by entering into an agreement with Tradewinds Plantation to rent the plots of land to the latter as the parcels are currently part of a larger oil palm plantation Tradewinds Plantation manages,” the research house said.

Meanwhile, Kenanga Investment Bank Bhd (Kenanga Research) said the proposed acquisition allows DRB-Hicom to replenish its industrial landbanks in Melaka and enable the group to pursue the development of new industrial parks in the state.

“The closest industry area is the Hicom Pegoh Industrial Park, which has two Honda production lines.

“Currently, DRB-Hicom has only 600 acres (242.8ha) of industrial landbanks and will further expand to 2,700 acres, an estimated gross development value (GDV) of RM9 billion once the other proposed land swap disposal is completed in December 2020,” it said in a separate research note.

Kenanga Research opined that should the proposed acquisition materialise, it is expected to increase DRB-Hicom’s net gearing to 0.76 time from 0.73 time as recorded in June 30, 2020.

“We are neutral on this proposed acquisition as the expected development of the land plots will only start in 2022 with its GDV is estimated at RM600 million.

“We believe the proposed acquisition will have minimal earnings impacts for the next two years with the expected rental income to be received (undisclosed) will be offset by the interest costs to fund the acquisition,” it said.

Both CGS-CIMB and Kenanga Research raised their target prices for DRB-Hicom to RM2.35 and RM2.10 respectively.

The conglomerate’s share price closed yesterday at RM1.86, a 2.11% or four sen down from its previous close with a market capitalisation of RM3.6 billion.

DRB-Hicom announced last Friday that its indirect wholly owned subsidiary, Hicom Glen Sdn Bhd, is buying 116.44ha of Tradewinds Plantation’s lands in Alor Gajah, Melaka, for RM240 million which is intended for industrial park development.

Hicom Glen signed a conditional agreement with Tradewinds Plantation’s unit Eksklusif Pesona Sdn Bhd to acquire the 10 contiguous parcels of agricultural land, currently planted with oil palm trees that have been approved for industrial use.

DRB-Hicom said it plans to begin land development in 2022, subject to the prevailing future property market conditions.