MARC AFFIRMS ITS AA-IS RATING ON DRB-HICOM’S IMTN; OUTLOOK REVISED TO STABLE

Dec 23, 2013 -

MARC has affirmed its rating of AA-IS on DRB-HICOM Berhad’s (DRB-HICOM) RM1.8 billion Islamic Medium Term Notes (IMTN) programme. Concurrently the rating outlook is revised to stable from negative. The outlook revision reflects MARC’s view that the negative pressure on DRB-HICOM’s credit metrics has eased as proceeds from a series of asset sales have been utilised to reduce group borrowings. MARC expects additional proceeds from impending asset divestments to be used to further pare down group debt levels to improve liquidity and strengthen group balance sheet. The affirmed rating incorporates DRB-HICOM’s strong market position in the automotive sector, its ongoing challenges to streamline and strengthen its automotive division following the acquisition of Proton Holdings Berhad (Proton), and its business profile that generates a moderately diversified revenue stream. The rating is moderated by the increased dependence of the group’s performance on the cyclical automotive sector, which is also prone to regulatory changes, and the group’s inclination to undertake acquisitions, which in recent years have been largely funded by debt.

MARC notes that the recent disposal of DRB-HICOM’s power plant operations under HICOM Power Sdn Bhd (HICOM Power) and the consolidation of Proton’s car distribution network have been followed by divestments in the group’s various non-core business units. In addition, the group is finalising the sale of its 51%-interest in Uni.Asia Life Assurance Berhad for RM264 million. The asset disposals are expected to generate about RM3.0 billion, of which RM930.2 million has been collected as of to date. Proceeds from the asset sales will be utilised to reduce DRB-HICOM’s debt at the holding company level, which had risen sharply to RM4.0 billion as at September 30, 2012 (1HFY2013) on debt-funded acquisition of Proton’s entire equity stake for RM3.02 billion in June 2012. MARC observes that the holding company debt has declined to RM3.1 billion in 1HFY2014, resulting in a lower gearing level of 0.53 times (1HFY2013: 0.74 times). This is expected to reduce to RM2.9 billion by end-FY2014. MARC opines that the sizeable divestment proceeds will be sufficient to meet the company’s acquisition-related debt repayment through FY2017. However, any significant purchases may scuttle the group’s plans to pare down its borrowings to a level that would provide comfortable headroom at its current rating level. 

MARC draws some comfort from the group’s efforts to resolve both the financial and operational issues of Proton’s UK-based loss-making subsidiary, Lotus Group International Limited (Lotus). The group is in the midst of completing the refinancing of Lotus’ debt of £207.3 million (approximately RM1.1 billion) with a term loan to be taken at Proton’s level; the longer debt maturity profile of the term loan will alleviate near-term liquidity pressures. Lotus sales volume is improving with 1,159 units sold in FY2013 and 825 units for 7MFY2014. MARC also notes that Proton registered stronger sales performance with volume increasing to 73,706 units in 1HFY2014 (1HFY2013: 72,046 units), contributed in part by the strong demand for its modestly-priced Saga model.

DRB-HICOM, whose other marques include Honda, Isuzu, and Audi, is one of the leading domestic automotive players with about 39% share of total industry volume for 4MFY2014. While DRB-HICOM is expected to rationalise the group’s car production operations to place the division on a stronger footing, MARC views its ongoing challenges in the mainly high-volume low-margin driven automotive segment, including the need to fund sizeable capital expenditure requirements, to weigh on the division’s earnings growth.

DRB-HICOM’s services division that includes concession asset operators (Puspakom Sdn Bhd, KL Airport Services Sdn Bhd (KLAS) and Alam Flora Sdn Bhd) is expected to continue to generate moderate earnings. The acquisition of Konsortium Logistik Berhad (KLB), a logistics service provider, for RM391 million which includes the potential mandatory general offer for KLB’s remaining 38%-stake for RM150 million, is expected to provide synergy to the operations of KLAS. DRB-HICOM’s expected dilution of ownership in its banking subsidiary Bank Muamalat Malaysia Berhad by end-2014 should enable the group to realise dividend potential from the bank.

For 1HFY2014, DRB-HICOM group registered revenue of RM6.7 billion (1HFY2013: RM7.0 billion) and profit before tax of RM323.8 million (1HFY2013: RM260.6 million). The improved earning in 1HFY2014 was mainly due to lower impairments charges at Proton as compared to the previous year’s corresponding period. MARC also notes that the profit margin of the group’s automotive division of 5.5% in 1HFY2014, while higher than the 3.0% recorded in FY2013 (FY2012: 6.6%), remains thin. Group consolidated debt stood at RM6.2 billion including the rated RM1.8 billion IMTN at end-1HFY2014 (FY2013: RM6.5 billion), although this has been reduced to RM5.9 billion at end-November 2013.

At the holding company level, DRB-HICOM’s revenue and pre-tax profit stood at RM649.6 million and RM380.9 million respectively in FY2013 (FY2012: RM428.3 million; RM321.7 million). The increased revenue was mainly due to higher dividend contributions arising from the disposal of HICOM Power’s plant operations as well as dividend income from Proton. In the near term, high finance costs will weigh on the company’s profitability, but will decline as debt levels reduce. MARC expects debt repayments at the holding company level to be also supported by steady dividend income from the group’s operating subsidiaries, projected at an average of RM585 million per annum from FY2014-18.

The stable outlook incorporates MARC’s expectations that DRB-HICOM will maintain its financial metrics over the next 12-18 months that are commensurate with the current rating. The ratings could come under pressure should the group undertake any sizeable debt-funded acquisitions that may weaken its business and/or credit profiles.

Contacts:

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

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

Rajan Paramesran, +603-2083 2233/ rajan@marc.com.my.