CIMB Research sees DRB-Hicom sale of Proton as positive

CIMB Research:

KUALA LUMPUR: CIMB Equities Research is retaining its earnings forecast for DRB-Hicom and target price of RM1.60, which is a 10% discount to the realised net asset value (RNAV).

It said on Monday that a successful disposal of Proton at a good price would act as a catalyst for the share price.

It was commenting on a news weekly report that  DRB-Hicom Bhd is expecting as many as seven bids for Proton by the middle of this month and it may even sell as much as 100% of Proton to foreign buyers.

Based on industry sources, the report stated DRB-Hicom advised key stakeholders of the possibility that Proton will be wholly disposed of. The whole process is expected to be completed by the first quarter of next year. The sources added that DRB-Hicom made it clear that it was willing to sell up to 100% of Proton. 

How much it sells will depend on the proposals and prices it receives. The important thing is that the door is now open, explains a source. According to the report, most of the bids have already been received. 

“We gather that DRB-Hicom has received bids from up to five potential buyers, with one to two more due before the mid-August deadline,” it said.

Several international names have been quoted as being linked to this potential partnership, namely France’s Groupe PSA and Renault SA, Germany’s Volkswagen, America’s General Motors, Japan’s Suzuki and China’s Geely. As Proton had inked an MoU with Japan’s Suzuki in Jun 2015, we believe Suzuki could be a frontrunner,” it said.

CIMB Research pointed out DRB-Hicom’s sale does not mean that Proton will be controlled by foreigners. Recall that the government has the option to take up a 79.28% stake in Proton if it opts to convert its redeemable convertible cumulative preference shares (RCCPS) that were issued as part of a RM1.25bil loan.

Considering the fact that Proton needs additional equity injection from the acquirer, there are still many moving parts and the exact structure and terms and conditions of the disposal are still highly speculative.

The secretary of the special task force, Madani Sahari, was earlier quoted as saying that Proton could look into mimicking the Perodua-Daihatsu partnership model as it had proven to be a success thus far.

CIMB Research also pointed out the plan to sell a stake in the national car marker, Proton, to a foreign partner is not new. Prior to DRB’s acquisition of Proton in 2012, Germany’s Volkswagen and France’s Peugeot-Citroen were reportedly keen to acquire a stake.

“We are positively surprised by DRB’s willingness to dispose of its entire stake in Proton. We believe that, this time around, there is a higher chance that the sale of Proton to a foreign partner may succeed given the recent reorganisation in Proton’s top level management and its need for further equity injection.

“Proton posted a loss of RM1.4bil (or 72 sen a share) in its FY3/2016 results. This led DRB-Hicom to record a pretax loss of RM821.3mil. Excluding the loss, we estimate DRB-Hicom’s pretax profit was RM578.7mil. To recap, DRB-Hicom bought a 100% stake in Proton for approximately RM3bil in 2012.

“The disposal is expected to boost the future earnings of DRB-Hicom as it will no longer need to consolidate the losses of Proton, if it sells a 100% stake. The sale could also improve the group’s net gearing ratio of 0.51 times as at March 31, 2016 and boost future cash flows,” it said.