DRB-HICOM Bhd is expecting as many as seven bids for Proton Holdings Bhd by the middle of this month and may even sell as much as 100% of the national car manufacturer to foreign buyers.
While the move may spark a political backlash, hiving off loss-making Proton will be positive for DRB-Hicom’s bottom line and balance sheet.
According to industry sources, DRB-Hicom has 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.
“They (DRB-Hicom) have made it clear that they are willing to sell up to 100% of Proton. Of course, how much they sell will depend on the proposals and prices they receive. The important thing is that the door is now open,” explains a source.
Note that any decision will have to be presented to the special task force led by Datuk Seri Idris Jala, the CEO of the Performance Management and Delivery Unit, which is monitoring Proton’s turnaround.
However, the engagement with stakeholders sends a strong message that Proton’s disposal is firmly on course. It is understood that most of the bids have already been received with one or two more due before the mid-August deadline.
As previously reported by The Edge, French car manufacturers Groupe PSA and Renault SA have been in talks with Proton since the beginning of the year. Groupe PSA manufactures the Peugeot and Citroen while Renault is part of the Renault Nissan Alliance.
Other automakers that are said to be in the running are Germany’s Volkswagen and America’s General Motors. Naturally, Japan’s Suzuki Motor Corp is another top contender, given the memorandum of understanding that the two had signed last year for long-term cooperation.
At least one Chinese automaker, believed to be Geely, is said to have submitted a bid as well. Geely owns the Swedish marque Volvo.
However, it is important to note that a DRB-Hicom sale does not necessarily 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 RM1.25 billion loan.
Considering the fact that Proton will need additional equity injection from the acquirer, there are still many moving parts in the deal. Hence, the exact post-disposal structure or who will control Proton is still highly speculative at this stage.
From DRB-Hicom’s perspective, however, the disposal is good news. Proton’s sales have continued to decline this year and it is estimated to have sold fewer than 4,000 units in July. Even the new Proton Perdana, which is basically a rebadged Honda Accord, only managed to secure about 130 sales.
Proton’s results for FY2016 ended March 31 have not been released yet but based on DRB-Hicom’s financials, the automaker is estimated to have booked a loss before tax of more than RM1.4 billion. Note that Proton’s loss before tax in FY2015 was RM646.3 million.
While a chunk of the losses this year — about RM500 million — has been attributed to one-off losses, it is still a heavy toll on DRB-Hicom.
As a result, the conglomerate controlled by Tan Sri Syed Mokhtar Albukhary posted a loss before tax of RM821.3 million in FY2016 ended March 31. In FY2015, DRB-Hicom posted a profit before tax of RM501.8 million. The bulk of the losses has been pinned on Proton.
Stripping out Proton’s RM1.4 billion loss before tax, DRB-Hicom should have made a PBT of about RM580 million or 30 sen a share. As at last Friday, DRB-Hicom’s share price had surged nearly 22% in one week to close at RM1.11. On this basis, the company is potentially valued at only 3.7 times earnings, assuming that non-Proton earnings remain stable.
Keep in mind that a substantial portion of DRB-Hicom’s earnings comes from the relatively stable defence and aviation segment that contributes about RM2.4 billion to revenue each year.
On top of that, Honda, which DRB-Hicom assembles and distributes, has emerged as the top foreign marque in terms of sales with a market share of about 13.5% this year.
Furthermore, this ignores possible proceeds from the disposal of Proton and the subsequent deleveraging of DRB-Hicom’s balance sheet. However, it will take another seven to eight months for the whole exercise to be completed, barring any hiccups.
In that time, there could be other developments at DRB-Hicom. It would not be uncharacteristic of Syed Mokhtar to inject another asset into DRB-Hicom following the disposal of Proton.
On the other side of the coin, Proton’s potential suitors have lots of potential to realise from the national automaker.
“Foreign marques aren’t interested in the Malaysian passenger car market alone. It is small for them. They are more interested in using Tanjung Malim as a manufacturing hub to distribute within Southeast Asia,” explains an industry veteran.
This is why automakers with hubs in Thailand, for example, have not shown as much interest.
“They (the buyer) will simply shut down the Shah Alam plant, sell off the land and move everything to Tanjung Malim. With a little bit of investment, they can transform it into a regional hub,” he explains.
Another sweetener for the acquirer would be the ability to include the UK-based sports car Lotus in its portfolio.
As for Proton, with the right technological and financial support, along with disciplined restructuring, a new shareholder could very well lead it to its eventual turnaround.
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