MARC AFFIRMS ITS AA-IS RATING ON DRB-HICOM BERHAD’S IMTN; OUTLOOK REMAINS NEGATIVE

Feb 19, 2013 -

MARC has affirmed the rating of AA-IS on DRB-HICOM Berhad’s (DRB-HICOM) RM1.8 billion Islamic Medium Term Notes (IMTN) programme. The rating outlook is maintained at negative. The affirmed rating considers DRB-HICOM’s asset disposals which give the holding company moderate visibility as to its funding sources for debt servicing requirements over the next two years. MARC’s assessment of DRB-HICOM’s credit profile post acquisition of Proton Holdings Berhad (Proton) balances the holding company’s plans to improve its liquidity and reduce its debt levels through asset disposals against the more general unknowns with respect to the group’s ability to resolve its financial metrics to pre-acquisition levels beyond the next 12-18 months. The efficacy of initiatives by the group to put Proton on a stronger footing will be a key rating sensitivity. The negative outlook reflects pressure on DRB-HICOM’s credit metrics, particularly its capital structure and execution challenges with respect to its plans to strengthen Proton’s performance and to turn around its wholly-owned subsidiary, Lotus International Group Limited (Lotus).

MARC notes that following the RM3.02 billion acquisition of Proton’s entire equity stake on June 26, 2012, borrowings at the holding company level rose to about RM4.0 billion, inclusive of the RM1.8 billion IMTN, as at September 30, 2012 (1HFY2013).  As a result, the gearing ratio rose sharply to 0.74 times at end-1HFY2013 (FY2012: 0.55 times), exerting liquidity pressure on the company’s ability to meet principal and interest repayments of RM1.1 billion and RM400 million respectively in the next two financial years. MARC draws some comfort from the sale of DRB-HICOM’s power plant’s operating and maintenance subsidiary, HICOM Power Sdn Bhd (HICOM Power) for RM575 million, and Edaran Otomotif Nasional Sdn Bhd (EON) business and assets relating to Proton for RM400 million. Proceeds from the sale of RM1.07 billion, including cash balance of RM95 million in HICOM Power, will be utilised to reduce the company’s debt levels to about RM2.9 billion.

While MARC opines that these measures will address DRB-HICOM’s financial obligations in the intermediate term, additional timely disposal of other non-core assets would be key to meeting its longer term debt obligations. Meanwhile, DRB-HICOM faces operational challenges in managing the significant shift in business profile to being a largely automotive manufacturer with the inclusion of Proton, which has had an uneven operating and financial track record. Moreover, debt-laden Lotus remains a major concern, and DRB-HICOM is implementing a turnaround plan that may require additional funding. MARC notes that Proton has provided a corporate guarantee for a £270 million bank loan, of which £48 million remains undrawn.

For 1HFY2013, DRB-HICOM registered group revenue of RM7.0 billion (1HFY2012: RM3.1 billion), with the automotive division’s contribution accounting for 79% of the group’s revenue in 1HFY2013 (FY2012: 59%) due mainly to the incorporation of revenue from Proton. However, MARC observes Proton’s weak profitability has dragged down the group’s operating profit margins to 4.64% during 1HFY2013 (FY2012: 8.09%). In addition to exposure to volume risk in relation with the automotive industry performance, the group’s near- to intermediate-term earnings potential will be limited by high finance costs. The group’s total borrowings rose 18.5% to RM6.4 billion in 1HFY2013 (FY2012: RM5.4 billion), of which 62.4% is on the holding company’s balance sheet.

At company level, DRB-HICOM’s revenue and pre-tax profit in FY2012 stood at RM428.3 million (FY2011: RM500.3 million) and RM321.7 million (FY2011: RM433.8 million) respectively. The decline in revenue was mainly due to lower dividend contribution from its property arm while pre-tax profitability was affected by larger finance costs incurred during the year. Over the near to intermediate term, high finance costs will continue to weigh on the company’s profitability. MARC notes that going forward, further to dividend income generated from the existing operations, DRB-HICOM expects substantial dividend upstreaming from its newly acquired Proton. Proton’s ability to meet the holding company’s high dividend expectation is reflected by its moderate cash position which stood at about RM1.13 billion as at end-October 2012. To date, Proton has paid out three interim dividends totaling RM150 million.

MARC notes that Proton’s current cash position is sufficient to finance the purchase of Proton business and assets previously held by EON and meet dividend expectations over the medium term. However, the agency is concerned over the car maker’s ability to generate enough cash from operations beyond FY2015 which is contingent upon execution of the group’s various efforts to improve both Proton and Lotus’ operational and financial performance. 

The main rating sensitivities for DRB-HICOM relate to its ability to resolve its liquidity ahead of significant near- to intermediate-term debt maturities through its planned asset disposals and DRB-HICOM’s consolidated business and risk profile. The rating could be lowered if the group’s results and cash flow generation materially deviate from projections and the holding company fails to improve its liquidity position in line with MARC’s expectations.

Contacts:

Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;

Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;

Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my;

Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.