Asset sale to fund Proton's operations

This article first appeared in The Edge Malaysia Weekly, on August 6, 2018 - August 12, 2018.
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AFTER going on a buying spree by raising debt over the past few years, DRB-Hicom Bhd has Pos Malaysia Bhd, Proton Holdings Bhd, Composites Technology Research Malaysia Sdn Bhd (CTRM) and Konsortium Logistik Bhd under its belt.

Now, the diversified group has reversed its strategy by going on a selling spree to raise fresh funds to pare down its debts.

Last week, DRB-Hicom proposed to hive off waste management outfit Alam Flora Sdn Bhd to Malakoff Corp Bhd for RM944.61 million.

The deal would give DRB-Hicom an estimated net gain on disposal of RM735.4 million. The substantial one-off gain would boost its earnings should the deal materialise. More importantly, the group’s war chest will have an additional RM944 million cash.

The divestment comes five months after DRB-Hicom’s asset swap with its controlling shareholder, Tan Sri Syed Mokhtar Albukhary. The deal was valued at RM1.9 billion, and DRB-Hicom made a one-time gain of close to RM850 million.

To recap, the acquisition spree, which started in 2011, saw DRB-Hicom acquire a 32.21% stake in Pos Malaysia from Khazanah Nasional Bhd for RM622.79 million. Then, in 2016, DRB-Hicom hived off KL Airport Services Sdn Bhd and Konsortium Logistik to Pos Malaysia for RM749.35 million, and pushed its holding in Pos Malaysia up to 53.5%.

In January 2012, DRB-Hicom acquired a 42.74% stake in Proton from Khazanah Nasional for RM1.29 billion. It went on to privatise the car company for a total consideration of just above RM3 billion.

A year later, in 2013, DRB-Hicom acquired CTRM for RM298.3 million as well as a 66.1% stake in Konsortium Logistik for RM241 million.

“Proton requires regular funding to the tune of RM800 million to RM1 billion every three years or so to develop a new model,” a source familiar with the automotive industry says, adding that this means DRB-Hicom needs strong financial muscle.

Proton as well as DRB-Hicom’s property development operations require large amounts of cash to be injected before they can generate revenue.

The proposed sale of Alam Flora is thus viewed positively as it will give DRB-Hicom some breathing space while Proton gets its act together.

DRB-Hicom says it will use RM500 million of the proceeds from the Alam Flora sale for the repayment of Islamic medium-term notes, and spend the remaining RM444.61 million on “investments in existing businesses and future investment opportunities to be identified”.

For its financial year ended March 31, DRB-Hicom registered a net profit of RM498.44 million on sales of RM12.79 billion. The profits were brought about by an R&D reimbursement grant from the government of RM1.1 billion.

Excluding assets and liabilities held under Bank Muamalat Malaysia Bhd, DRB-Hicom had cash balances of RM2.85 billion, long-term debt commitments of RM3.46 billion and short-term borrowings of RM2.32 billion as at end-March.

To put things in perspective, DRB-Hicom’s finance cost for the 12 months ended March 31 was RM360.27 million.

In a note released last week, Public Investment Bank (PIB) says, “In our view, the disposal price of 9.7 times price-earnings ratio (for Alam Flora) is attractive as it is above our valuation of 8 times PER. We are positive about the deal as it will help to unlock the hidden value of non-core assets within the group.”

PIB has an “outperform” call and a 12-month target price of RM2.24 on DRB-Hicom.

The research outfit adds, “As at FY2018, Alam Flora accounted for circa 6% and 19% of total group revenue and profit after tax respectively. Nevertheless, we maintain our forecast for now, pending the completion of the proposed disposal.”

PIB has forecast a net profit of RM92.7 million on sales of RM13.17 billion for DRB-Hicom in FY2019.

China’s Zhejiang Geely gained respect after it acquired and turned around Swedish car company Volvo, and the operations of the London black cabs. This explains the growing optimism that there is light at the end of the tunnel for Proton.

To recap, in May last year, DRB-Hicom sold a 49.9% stake in Proton for RM460 million and a 51% stake in Lotus for £100 million to Geely.

The first Proton model — a Proton SUV based on the Geely Boyue and designed by former Volvo designer Peter Horbury — after the stake sale is slated to be released in October this year.

In January, Proton CEO Li Chunrong gave Proton vendors an ultimatum — they have to cut prices by 30% by year-end and work with Chinese suppliers.

With the sale of assets such as Alam Flora and parcels of land, Proton is expected to start bolstering DRB-Hicom’s bottom line.

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