Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on February 13-19, 2017.

 

THE billions in losses accrued by Proton Holdings Bhd over the years have pushed the company to the brink of insolvency. But the massive losses are also making Proton an attractive acquisition target for foreign strategic partners like China’s Geely Automobile Holdings Bhd and France’s PSA Group.

A closer look at Proton’s latest financial statement reveals that the company was sitting on RM7.93 billion in unrecognised deferred tax assets in FY2016 ended March 31. Today, this sum should easily exceed RM8 billion as Proton continues to bleed red ink.

The amount will enable Proton to go on a long tax holiday to the benefit of the national car maker’s shareholders — DRB-Hicom Bhd and the potential strategic partner — when it turns around.

Of course, this depends on transforming Proton into a profitable company.

It may be a tall order, but the tax break is substantial. The RM7.93 billion refers to the amount of tax payable that Proton will be potentially exempted from and not the pre-tax profit.

Given the corporate tax rate of 25%, these deferred tax assets will potentially cover profits for up to four times their face value — roughly RM32 billion. In fact, the sum is so huge that one tax consultant says it has to be discounted.

“It is going to take a long time to realise the value of these deferred tax assets. One way to value them is to find the net present value. You’d have to project Proton’s profits over many years, calculate the tax payable and discount it like you would cash flow,” he explains.

“Don’t forget that Proton is not expected to be profitable immediately. There will probably be even more costs incurred during the first few years post-acquisition as new investment flows in. This could inflate the deferred tax assets even further.”

It is also important to note that the deferred tax assets are classified as “unrecognised”. This is “due to the uncertainty that future taxable profits will be available, against which the group can utilise the benefits”, notes Proton’s financial statement.

In short, the auditors did not expect Proton to make a profit, hence the deferred tax assets were not recognised. In fact, Proton’s balance sheet only recognised RM20.15 million in deferred tax assets on the company’s statement of financial position.

The unrecognised deferred tax assets are broken into three main components — RM3.387 billion for unutilised tax losses, RM2.331 billion for unabsorbed capital allowances and RM2.14 billion for unutilised reinvestment allowances. The balance is for other deductible temporary differences.

Of the three, the unutilised tax losses of RM3.387 billion will be the easiest to monetise.

“Proton will definitely be able to use the RM3.387 billion in the future, if it makes a profit. DRB-Hicom’s new partner can inject any profitable business into Proton and utilise these tax credits. Companies do it all the time — injecting a profitable business into another shell that carries a lot of tax credits. There is nothing unusual about this, except perhaps the amount,” explains the tax consultant.

“As for the unabsorbed capital allowances and the unutilised reinvestment allowances, they are a little more conditional. They will only apply to similar types of businesses for which they were originally granted. In Proton’s case, if the tax credits were given for automotive manufacturing, they can only be redeemed by a similar business. This may leave some room for interpretation by the taxman.”

That said, returning Proton to the black will still be a monumental task.

Last year, Proton only managed to sell 72,290 cars, slipping to third place behind Perodua and Honda, with a market share of 12.5%. Compared with the 102,174 units sold in 2015, sales were down 29.2% year on year.

To be fair, Proton launched several new models towards the end of last year — the new Saga and the new Persona. Sales, however, appear to be lacklustre. Industry sources say Proton only managed to sell 7,200 units last month, down 6.9% y-o-y.

In contrast, the total industry volume last month fell only 0.6% y-o-y to 44,330 units.

This is not a good sign. Proton booked a net loss of RM1.46 billion in FY2016 ended March 31. This was a big deterioration from the

RM646.3 million loss incurred a year earlier. Revenue also fell 17% y-o-y to RM4.84 billion in the same period.

It does not help that Proton’s wholly-owned subsidiary, Lotus Group International Ltd, continues to lose money, registering a pre-tax loss of RM191 million in FY2016.

Against this backdrop, it is no wonder that DRB-Hicom’s share price has risen 32% since last December in anticipation of the entry of a strategic partner. The stock closed at RM1.26 last Friday. Recall that DRB-Hicom booked a net loss of RM1.455 billion for the 12-month period ended Sept 30, 2016.

At present, sources say, it is down to a two-horse race — Geely and PSA. Geely, which has the Swedish marque Volvo in its fold, is said to be the front runner in the contest. However, it is still too early to discount PSA, which has brands like Peugeot and Citroen.

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