DRB-Hicom Bhd
(Dec 13, RM2.12)
Maintain outperform with target price RM3.95: Tun Dr Mahathir Mohamad has not only confirmed DRB-Hicom Bhd’s acquisition of Proton Holdings Bhd but is in favour of a lower selling price. This should ease the task of absorbing Proton in the immediate term and put DRB-Hicom in a stronger position to reap the long-term benefits of the deal.
The support of Volkswagen AG (VW) is another key factor as the removal of all government research and development grants will be an issue. We believe the DRB-Hicom/VW relationship will be strengthened by a Proton deal. We maintain “outperform” and target price basis of 10% discount to revalued net asset value (RNAV).
Mahathir, a special adviser to Proton, has said sovereign wealth fund Khazanah Nasional Bhd is selling its 42.7% stake in Proton to DRB-Hicom. “I worry about the buyer having enough money to inject into Proton. The shares it will be buying are above market price which will make profitability difficult,” he said. “But I believe in DRB-Hicom’s capabilities.”
Mahathir’s statement obviously lends credence to reports of such a deal though he seems concerned the price is too high because of its future investment commitments. A general offer at the higher end of the range reported in the press of RM7 per share would entail RM3.8 billion investment from DRB-Hicom. Capital expenditure thereafter in Proton is estimated at RM900 million a year.
The removal of R&D benefits would increase this to RM1.2 billion. A cash call would be needed both at DRB-Hicom and Proton levels.
We believe that DRB-Hicom will only be able to absorb Proton fully if it merges it with its own auto assets into a special purpose vehicle and then sells a stake or invites an equity injection into the SPV by VW. This would allow for a valuable spin-off of the SPV in an amalgamated listing at a later date.
Mahathir seems to to be lobbying for a more favourable price which should ease post-M&A earnings risk. While the situation remains fluid, it looks like DRB-Hicom’s bargaining position in the acquisition of a strategic asset has been strengthened. — CIMB IB Research, Dec 13
(Dec 13, RM2.12)
Maintain outperform with target price RM3.95: Tun Dr Mahathir Mohamad has not only confirmed DRB-Hicom Bhd’s acquisition of Proton Holdings Bhd but is in favour of a lower selling price. This should ease the task of absorbing Proton in the immediate term and put DRB-Hicom in a stronger position to reap the long-term benefits of the deal.
The support of Volkswagen AG (VW) is another key factor as the removal of all government research and development grants will be an issue. We believe the DRB-Hicom/VW relationship will be strengthened by a Proton deal. We maintain “outperform” and target price basis of 10% discount to revalued net asset value (RNAV).
Mahathir, a special adviser to Proton, has said sovereign wealth fund Khazanah Nasional Bhd is selling its 42.7% stake in Proton to DRB-Hicom. “I worry about the buyer having enough money to inject into Proton. The shares it will be buying are above market price which will make profitability difficult,” he said. “But I believe in DRB-Hicom’s capabilities.”
Mahathir’s statement obviously lends credence to reports of such a deal though he seems concerned the price is too high because of its future investment commitments. A general offer at the higher end of the range reported in the press of RM7 per share would entail RM3.8 billion investment from DRB-Hicom. Capital expenditure thereafter in Proton is estimated at RM900 million a year.
The removal of R&D benefits would increase this to RM1.2 billion. A cash call would be needed both at DRB-Hicom and Proton levels.
We believe that DRB-Hicom will only be able to absorb Proton fully if it merges it with its own auto assets into a special purpose vehicle and then sells a stake or invites an equity injection into the SPV by VW. This would allow for a valuable spin-off of the SPV in an amalgamated listing at a later date.
Mahathir seems to to be lobbying for a more favourable price which should ease post-M&A earnings risk. While the situation remains fluid, it looks like DRB-Hicom’s bargaining position in the acquisition of a strategic asset has been strengthened. — CIMB IB Research, Dec 13
