News

• DRB’s 100% owned Proton Holding Berhad (Proton) will issue 1.25bn new redeemable convertible cumulative preference share (RCCPS) to GOVCO (99.99% owned by Ministry of Finance) worth RM1.25bn based on conditional subscription agreement effective 7 June 2016. The proceeds of the exercise will be used to pay Proton’s creditors, vendors and suppliers.

• The RCCPS is entitled for a cumulative 4% dividend yield and conversion rate at 1 RCCPS: 1.152 new Proton share. The tenure of the RCCPS is 7 years (first RM300m), 10 years (next RM400m) and 15 years (remaining RM550m).

• Under the agreement, Proton needs to implement its restructuring/turnaround plan (presented to PEMANDU), which includes the relocation of operation in Shah Alam plant to Tanjung Malim plant and expansion of business domestically and internationally.

• Proton (at its best endeavor) also needs to seek and identify a strategic and renowned partner who will assist in research and development for Proton to become a competitive player in automotive industry at the international level.

• Assuming GOVCO to convert the RCCPS and the accumulated dividends into 2.1bn new Proton shares, DRB’s stake in Proton will be diluted to 20.72% (associate level), i.e. Government will again become major shareholder at 79.28% of Proton.

Comments

• We are positive on the announcement, on the commitment of government in ensuring Proton’s revival. The RM1.25bn RCCPS is on top of the previous RM1.5bn soft loan grant to recapitalize Proton for transformation and restructuring.

• We note that Proton needs the cash to repay vendors and ensure the continuation of supply chain operations for the success of its upcoming new launches – Perdana, Persona, Saga and Suzuki MPV. The new launches should cushion the cash-flow requirements and survivability in the short to medium terms. However, Proton needs a strong partner to lead it into international level playing field with improved products and technologies.

Risks

• Prolonged bank tightening measures on lending rules.

• Slowdown of the Malaysia economy affecting car sales.

• Global automotive supply chain disruption.

• Slow integration of Proton and Pos.

Forecasts

• Unchanged.

Rating

HOLD

• Positives – 1) Restructuring of Proton and Lotus; 2) Partnering VW group to set up regional hub in Malaysia; 3) Honda Malaysia to set up regional hub for Hybrid car; 4) Deftech’s MoD contract of RM7.55bn over 7 years; and 5) Synergy of POS with DRB’s other business units.

• Negatives – 1) Tighter financing rules; 2) Weakened consumer sentiment; 3) Weakening of MYR; and 4) Intense competition from rival automotive marques.

Valuation

Maintained HOLD on DRB with unchanged Target Price of RM0.80 based on 35% discounts to SOP.

Source: Hong Leong Investment Bank Research - 7 Jun 2016