DRB-Hicom (DRB) announced that its wholly-owned subsidiary Proton Holdings (PHB) proposed an issuance of 1.25bn new redeemable convertible cumulative preference shares (RCCPS) to GOVCO Holdings. The subscription of the new RCCPS will raise a total cash of RM1.25bn at an issue price of RM1.00 per share. We understand that the proceeds will be used to settle the outstanding balances payable to PHB Group’s creditors, vendors and suppliers. We are positive on this as we believe it can help to regularise the cash flow of Proton in during a challenging operating environment at its auto segment and accelerate the turnaround process at Proton. We maintain our Outperform call on DRB with an unchanged SOTP target price of RM1.26.

Proton to raise RM1.25bn. The issuance of up to 1.25bn new redeemable convertible cumulative preference shares (RCCPS) by Proton (PHB) to GOVCO Holdings, a 99.99%-owned by Minister of Finance (MOF) is priced at RM1.00 each and expected to be completed by today. Total subscription of the preference shares is estimated to raise cash amounting to RM1.25bn. The RCCPS has a cumulative annual preferential dividend rate of 4.0%. Correspondingly, PHB need to seek and identify a strategic and renowned partner who will assist in research and development to become a competitive player in automotive industry at the international level within a year.

Use of proceeds. PHB will utilise the proceeds of RM1.25bn to settle the outstanding balances payable to PHB Group’s creditors, vendors and suppliers.

Our view. As at March 2015, PHB has a total borrowing of c.RM1.7bn, which accounted for 24% of DRB’s total debt. The proposed issuance will reduce DRB’s FY16 net gearing from 0.88x to 0.58x. We are positive on this as we believe it can help to regularise the cash flow of Proton during a challenging operating environment at its automotive segment and accelerate the turnaround plans at Proton. The RCCPS is expected to yield at 4.0%, which is fair in our opinion, as current cost of debt for the Group is ranging from 4% to 7%. On the assumption that GOVCO converts the entire 1.25bn RCCPS and dividend declared of RM574m into new PHB shares at the end of the tenure (up to 15 years), DRB’s shareholdings in Proton is expected to be diluted from 100% to c.20.72%, on the conversion basis of 1.152 new PHB shares for every one RCCPS.

Source: PublicInvest Research - 7 Jun 2016