News

• DRB has made 3 concurrent announcements:
  1) Proton has completed the remaining RM250m RCCPS to GOVCO (on top of the existing RM1.25bn);
  
  2) DRB will purchase the first RM300m tranche of RCCPS and the accompanied dividend of RM50m from GOVCO. Furthermore, DRB will create a first charge of certain assets to the benefit of GOVCO , in which the assets will have an indicative face value of the remaining RM1.2bn RCCPS . In the event Proton fails to redeem the RCCPS, GOVCO is entitled to direct DRB to liquidate the charged assets and the proceeds will be repaid to GOVCO for the unredeemed RCCPS with any shortfall to be covered by DRB.
  
  3) Ministry of Finance has agreed to reward RM1.1bn as part of Research and Development Reimbursement Grant to Proton , which will complete upon signing of Definitive Agreement between Proton and Geely (FSP) by 23 June 2017. The proceeds of the RM1.1bn will be used to repay banks debts and interest (RM533.3m) and repay advances from DRB (RM566.7m).

Comments

• We are relatively negative on DRB purchasing over GOVCO’s RCCPS of RM1.5bn in Proton, which has effectively increased DRB’s commitment in Proton’s long term turnaround plan . Furthermore, DRB has also committed itself in providing financial guarantees for Proton to repay GOVCO’s RM1.5bn together with dividends (in stages/tranches until 2031).

• Nevertheless, we are still positive on DRB benefiting from Proton partnering FSP Geely , as Geely agreed to support Proton’s turnaround plan with its technology, platform and skillset. Furthermore, DRB‘s forward earnings will improve drastically from reduced stake exposure to Proton’s immediate loss and discontinued exposure to Lotus’s loss (full disposal).

• Proton will leverage on Geely for turnaround, which will partially relieve the burden on DRB , while DRB will re focus its resources into other strategic businesses.

• DRB also benefits from retaining part of Proton’s valuable non-core assets (including Shah Alam plant and land), cash proceeds of UK£100m (RM560m) from Lotus disposal and RM566.7m payments from Proton.

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 respectively.

Forecasts

• Unchanged.

Rating

BUY ↔

• With the emergence of Geely as strategic foreign shareholder for Proton, we can expect re-rating catalyst on DRB’s valuation.

Valuation

• Maintain BUY on DRB with lower TP of RM2.26 (from RM2.58) based on higher holding company discount rate of 30% (from 20%) to SOP, given the higher risk assumed by DRB in taking over GOVCO’s RM1.5bn RCCPS to Proton

Source: Hong Leong Investment Bank Research - 23 Jun 2017