DRBHCOM (1619) DRB-HICOM BHD - PSA to buy Proton?
This article first appeared in The Edge Financial Daily, on February 21, 2017.
DRB-Hicom Bhd
(Feb 20, RM1.38)
Maintain add with an unchanged target price (TP) of RM1.69: An English daily reported on Saturday that French PSA Group is likely to be chosen as the foreign strategic partner (FSP) for Proton Holdings Bhd as it presented the best proposal to rescue and expand Proton’s operations in Asean. For example, the report’s sources mentioned that PSA plans to raise Proton’s capacity from 150,000 units per year to one million to two million units per year.
PSA also proposed to consolidate Proton’s production by transferring the production lines in the Shah Alam plant to the underutilised Proton City plant in Tanjung Malim in order to gain better economies of scale and become more competitive. PSA is said to be ready to finance the construction of the new plant in Tanjung Malim. According to the latest filling, PSA had net cash of €4.5 billion as at December 2015.
The article stated that another contender for the controlling stake in Proton, Geely Automobile Holdings Ltd, was more interested in acquiring the British sports car manufacturer Lotus than taking a stake in Proton. The report’s sources stated that Geely wants Lotus’ technology, rather than Proton’s excess production capacity. We are not surprised by news of Geely seeking to tap into Lotus’ engineering technology and experience in consulting and development for other global automakers.
We think PSA would be a good fit for Proton given its strength in the sport utility vehicle (SUV) segment. The article mentioned that PSA intends to produce SUVs for the Asean market and Proton currently does not have exposure to the SUV segment.
We note that demand for SUVs in Malaysia is strong, given the popularity of SUV models such as the Honda HR-V and CR-V, and the Mazda CX-5. PSA’s entry is likely to make its products more attractive due to competitive pricing, as there will not be any import duties on cars originating from Asean.
The article reported that PSA appears more interested in acquiring a controlling stake in Proton, while Geely prefers to acquire Lotus (instead of DRB-Hicom Bhd’s entire stake in Proton). DRB-Hicom stands to benefit from the proposed disposal or reduction in Proton stake, as it would no longer be required to consolidate Proton and Lotus’ losses in its group financial statements. Excluding Proton, we estimate that DRB-Hicom would have reported a RM467 million net profit in financial year 2016 (FY16), instead of a RM992 million net loss.
We maintain our “add” call on DRB-Hicom, with an unchanged sum-of-parts-based TP of RM1.69 (10% discount to its revalued net asset value). Our “add” call is supported by the imminent FSP for Proton and better performance by DRB-Hicom’s services division. Key downside risks are the lack of an FSP for Proton and further deterioration in Proton’s earnings. — CIMB Securities, Feb 19
DRBHCOM (1619) DRB-HICOM BHD - PSA to buy Proton?
http://www.theedgemarkets.com/my/article/psa-buy-proton#
