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Thursday, May 25, 2017

CIMB Research retains Add for DRB-Hicom

Thursday, 25 May 2017 | MYT 8:13 AM

KUALA LUMPUR: CIMB Equities Research is maintaining its Add for DRB-Hicom and sum-of-parts based target price of RM2.25 after China’s Zhejiang Geely Group (Geely) was selected as Proton’s foreign strategic partner.

The research house said on Thursday DRB-Hicom had inked a deal to tie up with Geely for a proposed joint venture via subscription of new shares in Proton Holdings Bhd (Proton).

This comprised of 49.9% of the enlarged shares for cash consideration of RM170.3mil and the injection of Geely’s Boyue sports utility vehicle (SUV) platform at a price to be determined once both parties finalise the deal.

“However, we estimate that the Boyue platform price would range between RM550mil to RM1bil,” it said.

Both parties are expected to sign the definitive agreement in July 2017.

“We make no changes to our earnings forecasts pending the deal completion. Maintain Add with an unchanged SOP-based target price of RM2.25.

“Based on our calculation, the potential implied value of a 100% stake in Proton, according to the subscription price, ranges between RM1.4bil and RM2.3bil. Key downside risks to our call are delays in Proton’s stake disposal and sluggish sales from Proton,” it said.

DRB-Hicom is exiting the sports car segment, and has decided to sell Proton’s entire stake in Lotus for a cash consideration of GBP100mil (RM556mil), which is 6.8 times above Lotus’s net asset value of RM82.1mil as at end Mar 2017.

Although the offer price is lower than the RM1.96bil that Proton invested in Lotus, the deal offers a good opportunity for DRB-Hicom to monetise its asset given Lotus’s long history of losses.

“We estimate that Lotus recorded more than RM1.5bil losses in the last five years,” it said.

CIMB Research was also positive on Proton’s partnership with Geely given that it will help to raise plant utilisation and offers Proton the opportunity to leverage Geely’s advanced technology through platform sharing, technology transfer, etc.

Moreover, Proton will be given the rights to manufacture, sell, market and distribute Geely platforms under the Proton brand name in Malaysia and potentially other countries in Southeast Asia.

“Overall, we believe that the partnership will expedite Proton’s recovery to sustainable profitability,” it said.

CIMB Research also said it came to understand Proton is also required to relocate its current manufacturing, testing-related research and development and administrative activities at the Shah Alam plant to its manufacturing plant located in Tanjung Malim.

“We understand that the group plans to relocate within six years from the proposed deal completion, which is also the end-of-life cycle for current models, estimated to be in 2021/2022. We believe that this move will help to improve Proton’s operating efficiency,” it said.


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