DRB-Hicom Bhd (Dec 8, RM2.18)
Maintain market perform at RM2.10 with fair value of RM1.90: Persistent market talk suggests that DRB-Hicom is looking at re-acquiring a stake in Proton Holdings Bhd. Its balance sheet is relatively unstressed with a net gearing of just 0.14 times or net debt of RM722 million as at end-September 2011. Assuming a prudential net gearing cap of 0.5 times implies an ability to fund an acquisition of up to RM1.8 billion. For the record, DRB-Hicom’s management has repeatedly denied having any interest in Proton.
Proton could be attractive to DRB-Hicom for its spare assembly capacity, especially as the latter cements its relationship with Volkswagen. However, DRB-Hicom’s management confirms there remains ample spare capacity at its Pekan plant, currently operating at 40% capacity. It can expand to accommodate higher assembly volumes should Volkswagen decide to expand its completely-knocked-down (CKD) assembly plans in Malaysia.
DRB-Hicom on its own can only bring new contract assembly business to Proton. For DRB-Hicom to bring value to Proton, a potential tie-up needs to involve a global original equipment manufacturer (OEM) — Volkswagen is the most likely candidate — that can offer access to technologies, new platforms, engines and transmissions. Hence, for a deal to succeed, a plan that may need to involve equity participation needs to be formulated that incentivises the global OEM to make available the said technologies.
Should DRB-Hicom acquire a controlling stake in Proton, political considerations will need to be carefully managed. This includes managing expectations and securing the buy-in from the authorities that have a vested interest in the longer term prospects for Proton.
We reiterate our “market perform” call on DRB-Hicom and sum-of-parts-derived fair value of RM1.90 (unchanged) that applies a 40% holding company discount. Improved financial transparency and increased investor understanding of the group’s businesses would reduce our applied discount over time. Macroeconomic uncertainties could cap share price performance in the near term. — RHB Research, Dec 8
This article appeared in The Edge Financial Daily, December 9, 2011.
Maintain market perform at RM2.10 with fair value of RM1.90: Persistent market talk suggests that DRB-Hicom is looking at re-acquiring a stake in Proton Holdings Bhd. Its balance sheet is relatively unstressed with a net gearing of just 0.14 times or net debt of RM722 million as at end-September 2011. Assuming a prudential net gearing cap of 0.5 times implies an ability to fund an acquisition of up to RM1.8 billion. For the record, DRB-Hicom’s management has repeatedly denied having any interest in Proton.
Proton could be attractive to DRB-Hicom for its spare assembly capacity, especially as the latter cements its relationship with Volkswagen. However, DRB-Hicom’s management confirms there remains ample spare capacity at its Pekan plant, currently operating at 40% capacity. It can expand to accommodate higher assembly volumes should Volkswagen decide to expand its completely-knocked-down (CKD) assembly plans in Malaysia.
DRB-Hicom on its own can only bring new contract assembly business to Proton. For DRB-Hicom to bring value to Proton, a potential tie-up needs to involve a global original equipment manufacturer (OEM) — Volkswagen is the most likely candidate — that can offer access to technologies, new platforms, engines and transmissions. Hence, for a deal to succeed, a plan that may need to involve equity participation needs to be formulated that incentivises the global OEM to make available the said technologies.
Should DRB-Hicom acquire a controlling stake in Proton, political considerations will need to be carefully managed. This includes managing expectations and securing the buy-in from the authorities that have a vested interest in the longer term prospects for Proton.
We reiterate our “market perform” call on DRB-Hicom and sum-of-parts-derived fair value of RM1.90 (unchanged) that applies a 40% holding company discount. Improved financial transparency and increased investor understanding of the group’s businesses would reduce our applied discount over time. Macroeconomic uncertainties could cap share price performance in the near term. — RHB Research, Dec 8
This article appeared in The Edge Financial Daily, December 9, 2011.
