Proton managed to regain market share in September
KUALA LUMPUR: CIMB Equities Research is retaining its Add call for DRB-Hicom with a slightly higher RM2.35 target price.
It explained on Wednesday it maintained its earnings forecasts, but raised its sum-of-parts based target price to RM2.35 to include the latest valuation for Proton based on Zhejiang Geely Holdings’s (Geely), share subscription value and transfer of non-auto assets from Proton to DRB-Hicom.
“However, we raise our RNAV discount from 10% to 20%, to account for the higher risk to DRB-Hicom following the transfer of Proton share conversion rights from the government to DRB-Hicom,” it said. Accelerated recovery in Proton’s earnings is a potential re-rating catalyst for the stock.
The research house said last Friday DRB-Hicom and Geely signed a definitive agreement whereby Geely will subscribe for a 49.9% stake in Proton and acquire a 51% stake in Lotus. Geely will subscribe for a 49.9% stake in Proton for a consideration of RM460.3mil and acquire a 51% entire stake in Lotus for £100mil (RM550mil).
Geely’s subscription price for Proton comprises an injection of RM170.3mil in cash and RM290mil in the form of its Boyue SUV to be converted into Proton’s first SUV model.
“Although the Boyue SUV platform is valued lower than an earlier guidance, DRB-Hicom still benefits from RM1.2bil in non-automotive assets extracted from Proton.
“We are positive on the deal as this should expedite a turnaround for Proton and immediately reduce the loss recognition in DRB-Hicom’s financials by half,” it said.
To recap, DRB-Hicom is buying the first tranche of the redeemable convertible cumulative preference shares (RCCPS) of RM300mil and preference dividend certificate of RM50mil from 99.99% Ministry of Finance Inc-owned GOVCO.
In addition, it is also extracting non-automotive assets from Proton totalling RM1.2bil to be pledged with the government as collateral against the balance RM1.2bil in soft loans.
“Essentially, the government will transfer its conversion rights into Proton shares to DRB-Hicom.
“DRB-Hicom has received approval from the Finance Ministry for the reimbursement of research and development activities totalling RM1.1bil carried by Proton’s wholly-owned unit Perusahaan Otomobil Nasional.
“The grant will be disbursed upon the completion of the definitive agreement, together with the remaining RM250mil from the RCCPS.
“The group plans to utilise the R&D grant to settle in full its loan facility to its lenders, together with all interest accrued, amounting to RM533mil, and use the remaining R&D grant balance of RM567mil to help Proton partially reduce DRB-Hicom’s shareholder advances.
“Proton owed DRB-Hicom approximately RM1.13bil in shareholder advances as at the end of FY3/16. This exercise will to improve Proton’s balance sheet position ahead of the proposed Geely partnership in 4QCY17,” it said.
As for Geely’s Boyue SUV platform value of RM290mil, CIMB Research said it was lower than the group’s earlier guidance of more than RM550mil due to the lower seven-year DCF valuations by independent auditors that range from RM265mil to RM310mil.
“It expects the deal to be completed by 4QCY17. Based on the agreement, Proton will be given the licence by Geely to manufacture, sell, market and distribute the Boyue model under the Proton brand for the right-hand drive markets of Brunei, Indonesia, Malaysia, Singapore and Thailand.
“Proton and Geely will also explore the potential for additional platform sharing to sell other models across the region under the Proton brand,” it said.
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