News

• DRB’s 100% owned Proton will issue further 250m new redeemable convertible cumulative preference share (RCCPS) to GOVCO worth RM250m on top of the initial RM1.25bn RCCPS issued back in June (total sum of RM1.5bn).

• The terms of the new RCCPS are same with the initial RCCPS, at cumulative 4% dividend yield and conversion rate at 1 RCCPS: 1.152 new Proton share. The overall tenure of the combined RCCPS is 7 years (first RM300m), 10 years (next RM400m) and 15 years (remaining RM550m + new RM250m).

• The conditions are also the same: 1) implement its restructuring/turnaround plan; 2) relocate operation in Shah Alam plant to Tanjung Malim plant; 3) expansion of business domestically and internationally; and 4) 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 total RCCPS and the accumulated dividends into 2.56bn new Proton shares, DRB’s stake in Proton will be diluted to 17.65% (previously 20.72% based on RM1.25bn RCCPS), i.e. Government will become own 82.35% of Proton, while DRB will need to recognize investment losses of RM637.4m in Proton.

• Proton has been a drag to DRB’s performance for the past years, on heavy losses of RM462m in FY14, RM635m in FY15, RM1,456m in FY16 and RM244m in 1QFY17, due to poor car sales volume and subdued consumer sentiments.

Comments

• We are positive on the announcement, given government’s commitment to ensure Proton’s revival. The RM1.5bn RCCPS will help to recapitalize Proton for transformation and restructuring effort.

• The funds will support Proton’s cash flow and ensure successful launches of new models – Perdana, Persona, Saga and Suzuki MPV. The new launches should cushion the cash-flow requirements and survivability in the short to medium terms. A strategic partner to Proton will be able to support Proton’s long term growth and sustainability.

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 RM1.35 based on 20% discounts to SOP

Source: Hong Leong Investment Bank Research - 6 Sep 2016