Good news for DRB-Hicom

Shot in the arm: CIMB Research says the proceeds from the subscription shares will be utilised for the settlement of outstanding balances due to Proton’s creditors, vendors and suppliers.

The company’s shares are up on Proton’s capital injection exercise

INTEREST in DRB-Hicom Bhd briefly picked up early in the week, when it announced that the Government had agreed to subscribe to 1.25 billion redeemable convertible cumulative preference shares (RCCPS) issued by its wholly-owned subsidiary, Proton Holdings Bhd.

Following the announcement on Monday, DRB-Hicom shares closed up 17 sen to RM1.03 on Tuesday – its highest since April 20.

The move is considered a “shot in the arm” for loss-making Proton, which has been a drag on DRB-Hicom’s earnings.

CIMB Research in a recent report says that the capital injection will help Proton pay creditors, vendors and suppliers.

“The proceeds from the subscription shares will be utilised for the settlement of outstanding balances due to Proton’s creditors, vendors and suppliers.

“In addition, the Government believes Proton plays a crucial group in the national automotive industry, in which it employs about 12,000 workers directly under Proton and 50,000 under various vendor companies.”

CIMB Research says it sees the capital injection as a positive move for DRB-Hicom.

“We see this as a positive strategy towards Proton’s recovery, but remain wary of the execution risks. Moreover, we learned that in the event that Proton converts the entire RCCPS and its unpaid dividend, DRB-Hicom’s shareholdings in Proton will be diluted to 20.7% and the Government will hold the remaining 79.3%.

“Overall, this could potentially ease the financial burden on DRB-Hicom’s profitability and balance sheet.”

It was reported by StarBiz on Wednesday that the Government has no plans to nationalise Proton.

Drag on earnings

DRB-Hicom saw its earnings dragged by Proton in its fourth quarter ended March 31. The company reported a net loss of RM790.76mil from a previous net profit of RM89.8mil in the corresponding quarter of 2015.

The weaker earnings was mainly due to Proton’s lower vehicle sales, volatility in foreign exchange (forex) rates and weak consumer sentiment.

The reduced profit margins was due to weak forex which affected Proton’s raw material cost and the lack of new models during the financial period. In addition, Proton made provisions relating to certain non-recurring charges which had affected its bottom line.

DRB-Hicom’s revenue, meanwhile, dropped 17.98% to RM2.63bil.

For the fiscal year ended December 2015, Proton incurred a net loss of RM646.3mil versus a net loss of RM461.6mil in the previous year.

Year-to-date April 2016, Proton sales shrunk 27.4% to 23,702 units from 32,654 units in the previous corresponding period.

According to Public Investment Bank Research, Proton has total borrowings of RM1.7bil, which accounted for 24% of DRB-Hicom’s total debt.

CIMB Research says it is discouraged by DRB-Hicom Bhd’s continued losses and expects the group to face further challenges in its operations.

However, the research house says it is hopeful that the RM1.5bil government soft loan grant and the diversified group’s master plan to revive Proton will swing back its fortune.

“We will also be on the lookout for consumer reaction to Proton’s long-awaited launches expected this year,” it says in a note.

According to Kenanga Research, DRB-Hicom’s earnings contributions are expected to come gradually from the RM7.55bil AV8X8 contract, while the property division is expected to contribute positively from several launches.

“However, Proton is expected to continue losing market share resulting in the automotive division dragging down earnings. The outlook for DRB-Hicom remains challenging given the tough operating environment.”

The research house adds that the group is looking at a turnaround plan for Proton, which involves a the soft loan from the Government that is geared towards helping the national car company in its turnaround efforts, as well as to expand into domestic and international markets.

As a condition to the loan, Proton has been given a five-year time frame to improve its financials, find a strategic partner and repay the loan.

Kenanga Research has cut DRB-Hicom’s 2017 earnings by 20%, due to the poor set of results by taking into account lower volume sales at Proton and higher operating expenses.

Meanwhile, under the conditions to the RCCPS, Proton is required to obtain the necessary approvals from its shareholders in order to increase its authorised share capital.

The RM1.25bil RCCPS are in reference to the RM1.5bil soft loan that was granted to Proton by the Government in April. The granting of the loan came with several conditions, including having a turnaround plan to restructure the company and provide a strategic plan to expand its local and international market.

Turning around Proton

In April, the Government appointed a special task force, led by Performance Management and Delivery Unit CEO Datuk Seri Idris Jala, to monitor the implementation of Proton’s business recovery plan with the aim of making it more competitive.

The task force, which will not be involved in Proton’s day-to-day operations, will also monitor a strategic plan to increase domestic market shares, and to penetrate into international markets.

As one industry observer puts it, the Proton task force will help provide a fresh management perspective that will lead to the national carmaker’s sustainability and success in the future.

Another observer says: “The task group was formed to solve a business problem that couldn’t be solved internally by the company. It will govern itself and will hopefully reach decisions at a faster and more conducive pace.

“By taking on the tasks in a structured and focused manner, they will likely be able to reach solutions that the busy management might otherwise overlook.”

The task force comprises six people, three each from the private and public sectors.

Task force members from the public sector are: International Trade and Industry Ministry deputy secretary-general (industry) Datuk Nik Rahmat Nik Taib, Finance Ministry strategic investment division secretary Dr Yusof Ismail and Economic Planning Unit deputy director-general (macro) Datuk Yogeesvaran Kumaraguru.

Members from the private sector consist of Symphony House Bhd executive chairman and group chief executive officer Tan Sri Azman Yahya, Celcom-Axiata Bhd chief executive director Datuk Seri Shazalli Ramly and Maybank community financial services head Datuk Hamirullah Borhan.

Proton’s woes unfortunately come down to that of brand perception. The negative consumer perception on its quality has been a major blow to the national carmaker for many years.

Poor perception has led to distrust in the brand and ultimately, lagging sales.

In March, the company acknowledged that coming up with new models that allow it to compete with other brands, was key. Over the past three months, Proton has been hyping the launch of its new Perdana – which was initially planned for launch by the first quarter.

Proton is banking on the Perdana to help it achieve sales of 150,000 units this year.

Projected sales of 150,000 units for Proton means the company will have a market share of 20% of total vehicle sales in the country. It will also be a jump of almost 47% compared with sales last year where Proton sold 102,175 units with only 15% of market share. In 2014, Proton’s sales were 115,783 and it had 17% of the market share.

According to the Malaysian Automotive Association (MAA), vehicle sales last year were dominated by Perodua, which sold 213,307 units. The company had a commanding market share of 32%.

Honda was the top non-national brand with a market share of 14.2% or 94,902 units. Toyota was a close second with 14.1% or 93,760 units (of which 65,295 were passenger vehicles and the remaining 28,465 commercial vehicles).

This was followed by Nissan with 7.1% or 47,235 vehicles, of which 41,941 were passenger vehicles and the remainder 5,294 commercial vehicles.

The automotive industry has been growing for six consecutive years since 2010, peaking at a new all-time high of 666,674 units last year. However, due to the subdued consumer sentiment, sluggish economy, weaker ringgit and tighter lending requirements, MAA has forecast total industry volume to drop by 2.5% to 650,000 units in 2016 compared with last year.