Whenever discussions on the automotive conglomerate arise, invariably attention turns to DRB-Hicom Bhd. Its sprawling automotive complex in Pekan, which assembles cars for Mercedes-Benz and Volkswagen, has grown from strength to strength, either organically or through acquisitions.
DRB-Hicom's revenue has more than tripled to RM12bil since the takeover in 2004, with its net profit at RM1.32bil in financial year ended March 2013. It was a surge in profits after recognising RM971mil negative goodwill from the acquisition of Proton, while operating profit improved 11% to RM534mil from a year ago.
As at the week's close of RM2.75, it trades at a price to earnings ratio of around 8 times, seemingly cheap for a company of such proportion with key strategic assets like Proton and Pos Malaysia Bhd.
With its underperforming share price, it's now at a substantial discount of 23% to its net tangible asset per share at RM3.60 which translates to RM7bil. While its total assets stand at RM40bil, and borrowings at RM6.2bil.
Five out of eight research houses tracked by Bloomberg have a "buy" call on the company, with a consensus target price of RM4.
Those numbers have not gone unnoticed, as foreign funds have been accumulating its shares, with its foreign shareholding for the floated shares standing at 19.65% as at Dec 2013, compared with just 11.62% recorded in Dec 2010.
It counts Norwegian fund like Skagen AS and Norwegian bank Norges Bank among its top five substantial shareholders, while BlackRock, the world's largest fund manager, also has a stake in the company.
However, similar to its recently acquired unit, national carmaker Proton Holdings Bhd, it suffers from a perception problem with investors shunning the stock due to the "perceived" political risk, while Proton has a "subpar" value attached due to its legacy issues.
While group managing director Tan Sri Mohd Khamil Jamil skirted the question about perception at a media excursion to Sabah recently, he concurred that change is the only constant with more rationalisation and synergies reaped within the group, before markets recognised the value of the company.
It was also a vindication of sorts two weeks ago when a Proton Preve was involved in a high speed collision, that even flipped the car a few times on the East Coast Expressway, with the engine dislodged. Many ridiculed the quality of Proton when pictures of the accident went viral on social media, but the main point is that the lady driver escaped unscathed, partly due to sheer luck and the quality improvements on certain manufacturing processes and body structure.
Mohd Khamil Jamil (third from left) addressing the press recently. With him are (from left) corporate affairs group director Datuk Carol Chan, services and properties COO Datuk Mohamed Razeek Md Hussain and Ahmad Fuaad.
In technical terms, Proton project management and strategic initiatives chief operating officer Abdul Rashid Musa said certain chassis parts have seen their tensile strength upgraded to up to 1,500 megapascals (MPa), compared to 500 MPa previously.
In layman terms, it would take more than 150 tonnes of force per sq m to deform a part with 1,500 MPa in tensile strength.
"The engine and rear roll mount was designed to detach upon serious impact. The accident shows the quality of the car as the driver could still open the doors to leave the car, showing the integrity of the side structure, even after an impact.
"It could be worse if the engine is still in the crumple zone, which can end up being pushed into the cabin area," he said.
Proton is slated to introduce a new car, codenamed P2-30A or the Global Small Car, in April, the first complete new creation since the takeover by DRB-Hicom two years ago.
Air support
On a broader picture, Khamil in his presentation to the press in Sabah last weekend highlighted its two newly acquired jewels, Composites Technology Research Malaysia Sdn Bhd (CTRM) and Konsortium Logistik Bhd (KLB) as the growth impetus for the company going forward.
CTRM has an outstanding orderbook of RM5.68bil which would keep it busy until 2020, with giant aircraft makers Airbus and Boeing being its main customers.
But DRB-Hicom is not looking at just the aviation industry but to synergise with its defence unit and even national carmaker Proton.
"Composites represent a huge opportunity, as certain parts could be manufactured to reduce weight while still maintaining the rigidity of the body panels. CTRM will give us another dimension to the automotive supply chain, even though Proton's unit Lotus have some light weight solutions," Khamil says.
DRB-Hicom bought CTRM in November last year for RM298mil in a deal with the Ministry of Finance. Currently, CTRM derives about 90% of its revenue from the manufacturing of aircraft composites at its plant in Batu Berendam, Melaka.
"CTRM's order book is enormous and it's growing, but I'm not just looking at the aerospace industry.
"As we move into lightweight bodyparts, composite materials would play a major role as the usage in the automotive sector for instance could reduce weight by 20%, hence producing a more energy-efficient vehicle, " he says.
Khamil says there are about 34,000 ordered aircraft to be manufactured worldwide, and as a super Tier-2 supplier to the aviation industry, major aircraft players would ultimately come to CTRM to manufacture parts for these aircraft.
"CTRM would give us the impetus and provide us the strength and infrastructure to improve our automotive and defence industry."
Its defence arm, Defence Technology Sdn Bhd (DefTech), would also start to recognise earnings contribution this year from its RM7.55bil 8x8 wheeled Armoured Vehicle (AV8) project.
Commissioned by the government for the Malaysian military, the project will involve the design, development and manufacture of 257 AV8s, with production peaking in 2016 and 2017. The first AV8 will be rolled out by the middle of this year.
When Khamil sees a fragmented business, he sees an opportunity. That was what happened when DRB-Hicom recently launched a RM392mil takeover for KLB. The takeover is expected to completed this quarter.
"Our goal is to make KLB the number one logistics provider as the logistics business in the country is very fragmented. Nobody does an integrated logistics business.
"Looking at DRB-Hicom, our strength is the diversity that we have, and our first mark would be KL Airport Services Sdn Bhd, and the last mark being Pos Malaysia Bhd. The in-between would be KLB," he says.
Currently, KLB is the primary logistics provider for Proton, and business from Proton alone amounts to RM100mil annually.
KLB recorded a loss of RM279,000 for its nine-month period ended Sept 30. It chalked up revenue of RM217mil.
"With KLB's enormous warehousing capacity of 1.4 million sq ft, and Pos Malaysia's 700 touch points in the country, I'm sure we would be the number one logistics provider in the country. Most of the products within Malaysia are moving to Singapore, and I believe that about 50% of the country's goods are currently centred towards Singapore" he says.
Top logistics player
With that, KLB's strongest territory is in the southern part of the country, and its competitive advantage stems from its position as a top integrated logistics player.
KLB is also expected to ride on the growth of the local logistics business. According to Frost and Sullivan, the national logistics revenue is projected to grow to RM196bil from RM146.5bil.
Meanwhile, the company is still hiving off more non-core assets, with its recent RM518mil divestment of its entire stake in Uni.Asia Life Assurance Bhd to Pramerica BSN Holdings Sdn Bhd.
It is also expected to pare down its 70% stake in Bank Muamalat to 40%. Its gearing ratio stood at 0.8 times as at September 2013, and the company still has room to take on more as it has a self-imposed gearing ratio of 1.25 times.
However, prudence is the mantra as chief financial officer Ahmad Fuaad Kenali mentioned that the company would only look at investments that offer a minimum 12% to 15% internal rate of return.
Khamil has set a target for the group to reach a revenue of RM17bil by 2015.
The Star Online: Metro: Sunday Metro
