Proton-Geely deal favourable to DRB-Hicom


DRB-HICOM Bhd will be on a better footing as its financial burden will become lighter after divesting a 49.9% stake in loss-making Proton Holdings Bhd to China’s Zhejiang Geely Holding Group Co Ltd (Geely).

Analysts believe the proposed corporate exercise with Geely will provide a respite to the diversified group as Proton’s financial woes have been a big drag on the the financial performance of DRB-Hicom since it was taken over and privatised in July 2012.

CIMB Equities Research and Kenanga Research expect DRB-Hicom to narrow losses in financial year 2018 (FY18) in anticipation the group will recognise a lower loss level at Proton, following the completion of the proposed joint venture with Geely.

For the past three quarters of the current financial year, DRB-Hicom has accumulated a loss of RM126 million.

In its latest interim financial report to Bursa Malaysia, DRB-Hicom said its loss for the year was slashed by 54% to RM454.4 million.

Contributing to the lower loss year-on-year was a RM398.11 million gain on a disposal of 90% stake in The Verge commercial development in Singapore last November and a RM468.4 million lower net loss incurred by Proton.

RHB Research Institute Sdn Bhd has raised its target price for DRB-Hicom to RM2.77, based on a higher break-up value of the company.

The research house raised its sum-of-parts valuation estimate on DRB-Hicom after factoring in the additional value of extricated assets and the government’s partial reimbursement of research and development (R&D) costs granted to Proton .

RHB Research described the deal between Geely and Proton as a “win-win” for both companies as Geely would be expediting its growth in the Asean market through the partnership.

“Geely brings a strong suite of production expertise, best practices, ready-made models to leverage off in the short term, including an effective distribution and after-sales business model,” RHB Research said in a research note.

Kenanga Research, however, was cautious on the latest development.

“The latest corporate development at DRB-Hicom is positive but not a surprise to the market — the company will see its losses narrowing for this year.

“We expect losses to be narrowed in subsequent quarters in anticipation of better car sales on the back of improving consumer sentiment,” it said.

Kenanga Research added that while Geely was known for its successful acquisition of Volvo, it had reservations on the ability of the Chinese company to assist Proton from a technical and marketing perspective.

“Geely is also a relatively weak brand from a global perspective with a global market share of less than 5%. Proton has to deal with the challenges posed by increasing competition and a weak brand perception,” it said

Kenanga Research’s target price for DRB-Hicom was trimmed slightly lower from RM1.75 to RM1.65 (20% discount to holding company status) due to concerns over execution risk in the new partnership in reviving Proton over the longer term.

Public Investment Bank Bhd said the price tag of £100 million (RM550 million) for the Lotus company was 28% below Proton’s original investment cost of RM1.98 billion, which could hurt DRB-Hicom’s financial performance ahead.

“We believe there could be some potential write-offs at group level upon completion of this disposal,” it said.

On the positive side, the research house said the disposal of Lotus would allow DRB-Hicom to relieve itself from the burden of possibly incurring further losses and pumping in substantial capital expenditures in the future.

MIDF Amanah Investment Bank Bhd also believed the deals looked favourable on a profit over net tangible assets basis.

To recall, Proton and Lotus both registered losses of RM987 million and RM68 million respectively for FY17.

“DRB-Hicom had to take haircuts relative to its initial investment in Proton of RM3 billion for a 100% stake and Lotus of RM1.96 billion for a 100% stake.

“Performances of both companies have deteriorated significantly since 2012, and based on their current states, the deal looks favourable on a profit over net tangible assets basis,” said the research arm.

Further highlighting the attractiveness of the Proton divestment, MIDF explained that under the proposed agreement, Proton would be granted the licence to manufacture, sell, market and distribute identified Geely platform vehicles under the “Proton” brand name in Malaysia for a period of five years.

“This should help Proton to plug the gap in cashflows and help generate cash to plough into R&D of new models for the next cycle beyond the five years for the rebadged models,” MIDF noted.

It added that the rights to manufacture and distribute Geely’s Boyue SUV model in South-East Asia markets should also drive meaningful volumes for Proton given its current absence in the SUV segment and should drive better cashflow generation.

Geely also owns Swedish-based Volvo and The London Taxi Co. Through the partnership with Proton, Geely noted it would focus on assisting Proton to sell 500,000 cars in Malaysia and around the region by 2020.

While the market awaits the details of the deal between DRB-Hicom and Geely for Proton, institutional investors like Lembaga Tabung Haji (TH) and the Employees Provident Fund (EPF) have used the past few months building up to the stake sale announcement to trade in DRB-Hicom shares.

TH bought into DRB-Hicom ahead of the news to emerge as a substantial shareholder in early March as EPF sold shares to below the 5% substantial stake level on March 2.

TH then started to trim its stake to below the 5% threshold by May 25 as EPF re-emerged as a substantial shareholder on June 1. The pension fund has continued to accumulate DRB-Hicom shares since.

DRB-Hicom shares closed the trading day at RM1.75 yesterday.