P R E S S A N N O U N C E M E N T
FOR IMMEDIATE RELEASE
MARC AFFIRMS RATINGS OF A+IS AND A-IS ON DRB-HICOM’S IMTN PROGRAMME OF UP TO RM1.8 BILLION AND PERPETUAL SUKUK PROGRAMME OF UP TO RM2.0 BILLION
The affirmed ratings reflect the improving credit profile of DRB-HICOM following a 49.9% dilution in its stake in Proton Holdings Berhad (Proton) and the full divestment of Lotus Advance Technologies Sdn Bhd (Lotus), which have led to a positive impact on the group’s liquidity and leverage position. The ratings also factor in the stronger performance of its non-Proton marques such as Honda, the improving prospects of its logistics business as well as stable revenue generation from sizeable contracts in its defence and aerospace businesses. Moderating the ratings are potential challenges in turning around Proton, given the intense competition in the domestic automotive industry and potential increase in capital expenditure to fund the expansion of DRB-HICOM’s logistics business.
The dilution of Proton to Zhejiang Geely Holding Group Co Ltd (Geely), a China-based automotive player, is a fulfilment of a key condition imposed by the Malaysian government on Proton to collaborate with a foreign strategic partner (FSP) pursuant to the subscription of Proton’s RM1.5 billion Redeemable Convertible Cumulative Preference Shares (RCCPS) in 2016. The government has since released a RM1.1 billion grant to Proton as a reimbursement for R&D expenses following the completion of the FSP exercise. With the government grant, and proceeds from the dilution of Proton and full divestment of Lotus, DRB-HICOM and Proton collectively received about RM1.7 billion. From the overall proceeds, DRB-HICOM will reduce group borrowings, which include Proton’s outstanding RM533.3 million term loan, to about RM6.0 billion from RM6.8 billion as at financial year ended March 31, 2017 (FY2017). This would result in reducing the debt-to-equity (DE) to 0.54 times and net-DE to 0.30 times (FY2017: 0.71 times; 0.42 times).
Proton is expected to benefit from its partnership with Geely given the latter’s manufacturing expertise, characterised by a low cost structure with innovative technology. Geely, which had 4% of China’s passenger vehicle market in 2016, produces 12 models under its brand name; it also produces Volvo cars through wholly owned Volvo Car Corporation which it acquired in 2010, and turned around the then loss-making Swedish car manufacturer. Over the near term, Geely will inject its Boyue SUV model into Proton’s model line-up and boost Proton’s manufacturing output by utilising its Tanjung Malim plant to assemble right-hand drive Geely and Volvo cars for the ASEAN market. DRB-HICOM has earmarked about RM180.0 million to fund Proton’s relocation to Tanjung Malim.
MARC observes that DRB-HICOM’s market position in the domestic automotive industry has remained strong, accounting for 35.4% of total industry volume of 284,875 units for 1HFY2018 (FY2017: 33.5%). Its market position remains supported by associate company Honda Malaysia Sdn Bhd, whose sales grew 15.7% y-o-y to 51,459 units. In addition to vehicle assembly and sales, the automotive division’s performance continued to be supplemented by its outstanding RM2.9 billion armoured military vehicles project as well as its RM11.0 billion aerospace component manufacturing order book. The long-term contracts provide earnings visibility for the group.
DRB-HICOM’s concession-driven business through PUSPAKOM Sdn Bhd (vehicle inspection) and Alam Flora Sdn Bhd (solid waste management) continue to provide modest earnings. However, its non-concession business has strengthened with DRB-HICOM increasing its stake in Pos Malaysia Berhad (Pos Malaysia) from 32.2% to 53.5% in FY2017. The consolidation of Pos Malaysia, which holds 52% share of the domestic courier services market, has supported the group’s financial performance. Pos Malaysia, which expects to invest about RM760.0 million to improve its courier services infrastructure, is lowly geared (DE: 0.12 times) with existing borrowings comprising only trade-related debts.
At the holding company level, DRB-HICOM’s revenue, comprising largely dividend income, increased to RM897.3 million in FY2017 (FY2016: RM335.8 million), largely from a one-off dividend payment following a non-core asset disposal. Its associate Honda is expected to remain the main contributor, having accounted for 38.5% of total dividend income in FY2017 (FY2016: 38.7%). For FY2018, the holding company’s projected RM202.2 million in dividend income, in addition to proceeds from planned land disposal of RM543.0 million, is expected to support its near-term obligations. The balance of the RM1.2 billion RCCPS held by the government is secured against Proton’s land assets of the same value that have been transferred to DRB-HICOM. The current outstanding under the IMTN and Perpetual Sukuk are RM1.52 billion and RM1.04 billion respectively.
The stable outlook reflects MARC’s expectation that DRB-HICOM’s credit metrics would remain commensurate with its current rating band. A positive rating action would be considered if DRB-HICOM demonstrates a sustainable improvement in its consolidated financial performance, in particular its cash flow metrics.
Contacts: Saifuruddin Othman +603-2717 2945 / saifuruddin@marc.com.my, Taufiq Kamal, +603-2717 2951 / taufiq@marc.com.my.
December 6, 2017
[This announcement is available in the MARC corporate homepage at http://www.marc.com.my]
--- DISCLAIMER ---
This communication is provided by Malaysian Rating Corporation Berhad (MARC) on the basis of information believed by MARC to be accurate and reliable as derived from publicly available sources or provided by the rated entity or its agents. MARC, however, has not independently verified such information and makes no representation as to the accuracy or completeness of such information. Any assignment of a credit rating by MARC is solely to be construed as a statement of its opinion and not a statement of fact. A credit rating is not a recommendation to buy, sell, or hold any security.
© 2017 Malaysian Rating Corporation Berhad
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