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This article first appeared in The Edge Financial Daily on March 26, 2018

DRB-Hicom Bhd
(March 23, RM2.47)
Maintain add with a target price (TP) of RM2.90:
We attended DRB-Hicom Bhd’s investors’ briefing last Thursday together with 80 analysts and fund managers at Holiday Inn Glenmarie, Kuala Lumpur, hosted by group managing director Datuk Seri Syed Faisal Syed Albar. DRB-Hicom is optimistic about Proton’s turnaround strategy underpinned by the carmaker’s 10-year business plan set out by its new management team led by CEO Dr Li Chunrong from Geely. The group also said the decision to exit non-core properties was on concerns over higher capital requirements.

 

At the briefing, DRB-Hicom shared four strategic focus areas to drive future growth: Turnaround of Proton by limiting operational losses via quality improvements, cost optimisation and new model launches, review of portfolio by exiting non-core property assets and focusing on industrial land development, creating value by digitalisation of Pos Malaysia Bhd and stake rationalisation in Bank Muamalat, and re-energising performance by establishing a turnaround plan for underperforming assets.

DRB-Hicom said following the tie-up with Geely in September 2017, Proton has been focusing on its quality improvement programme. The group expects the quality of Proton’s cars to be on a par with Geely’s by end-2018. DRB-Hicom also elaborated on its dealers’ network upgrade plan. It said Proton plans to increase its 3S (which offers sales, service and spare parts) and 4S (which offer sales, service, spare parts and body and paint services) centres from 75 currently to 109 by end-2018 and 150 in 2019. It plans to provide assistance through incentives in a bid to get dealers to upgrade.

DRB-Hicom also shared that Proton’s first sport utility vehicle (SUV) model, based on Geely’s Boyue platform, is still on track for launch in the fourth quarter of FY18 (4QFY18). The group expects the first batch to be China-built, while the completely knocked-down (CKD) version will come on stream potentially in the second half of calendar year 2019 (2H19). The group is also targeting to expand its product portfolio in the A, B, SUV and MPV segments for their export market potential. We learnt that these four segments account for 68% of Asean’s total industry volume.

The group explained the rationale behind the proposed disposal of non-core property assets was concerns over the lack of funding to redevelop and rejuvenate these property assets. Moreover, DRB-Hicom needs to focus on Proton’s turnaround plan that will require future capital expenditure (capex) to drive new model introductions. The potential proceeds from the land disposals will help the group to improve its balance sheet position with net gearing expected to fall from 50% in FY17 to 44% post the completion of its asset disposals. — CGSCIMB Research, March 23

 

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