DRB-HICOM Bhd - 2007

MARC has revised its rating outlook on DRB-HICOM Berhad’s (DRB-HICOM or the Group) Islamic Debt Securities (IDS) to positive from developing. The outlook revision affects the following IDS facilities:-

1.      RM200.0 million Underwritten Murabahah CP/MTN at A+ID /MARC-1ID ;
2.      RM120.0 million Murabahah CP/MTN facilities at A+ID /MARC-1ID  and;
3.      RM680.0 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) at A+ID .

The outlook revision reflects DRB-HICOM’s proposed divestment of its 20.2% stake in EON Capital Berhad (EONCAP) to Primus Pacific Partners Ltd (Primus). Part of the proceeds from the sale of EONCAP shares will be deposited into a designated account for the purpose of redeeming its RM680.0 million BaIDS as required under the terms of the issuance. The balance of the sale proceeds is expected to be used to fund DRB-HICOM’s future acquisitions and as working capital. The Group estimates that its gearing would fall below 0.50 times upon completion of the disposal, which is expected by the first quarter of 2008.

Meanwhile, the affirmed ratings reflect the Group’s good business positions in its key operating segments of automotive, property and construction as well as services i.e. Alam Flora and PUSPAKOM, and improving profitability and cash flow despite the challenging environment for domestic automotive players. Apart from its proposed divestment of its EONCap investment, DRB-HICOM has also proposed to acquire additional equity in Edaran Otomobil Nasional Berhad (EON), power plant operation and maintenance (O&M) operator, Rangkai Positif Sdn Bhd (Rangkai Positif) and Bank Muamalat Malaysia Berhad (Bank Muamalat). The Rangkai Positif and Bank Muamalat acquisitions should offer growth opportunities and increased business diversity, reducing the Group’s exposure to downturns in specific sectors. The use of equity to fund these acquisitions will facilitate the preservation of DRB-HICOM’s credit quality and prevent a depletion of its financial resources.

DRB-HICOM is currently involved in four core businesses: automotive, services, property and construction, and defence. In FY2007, services followed by the automotive segment were the leading revenue contributors. In terms of pre-tax profit, the property & construction segment was the largest contributor with six on-going high-end residential projects while the automotive segment incurred a pre-tax loss of RM245.6 million due to subdued demand and intense competition in the domestic market. The Group recorded profit before tax (PBT) of RM187.1 million for FY2007 compared with a loss before tax of RM196.7 million for FY2006. Contributing to the improved profitability were the better performance of the property and services sector and a RM131.3 million gain on waiver of borrowings arising from the debt restructuring of a subsidiary. This was offset partially by a RM131.0 million impairment charge relating to its investment in associated company, EON, made during the year.

The Group also generated substantially higher cash flow from operations in FY2007 in line with the improved profitability and decrease in inventories of its automotive operations. Consequently, DSCR (excluding borrowing proceeds received for the year) rose to 2.41 times. During the year, the Group redeemed RM150.0 million of its RM200.0 million Underwritten Murabahah CP/MTN. At the holding company level, the cash flow to service interest obligations is mostly derived from dividend income, and to a lesser extent, on interest received. Core cash flow interest coverage decreased slightly to 4.46 times in FY2007 due to a 5.6% decrease in dividends received. DRB-HICOM’s reported Net Cash Flow to Consolidated Interest Expense ratio was 3.41 times, in compliance with its minimum covenanted ratio of 2.0 times.

The Group pared down its borrowings by some RM370 million in FY2007, as reflected in the improvement in its Debt to Equity (D/E) and Debt to NTA ratio to 0.68 times and 0.87 times as of March 31, 2007. The Group has maintained minimum Net Tangible Asset (NTA) of not less than RM2.0 billion and a ratio of Total Debt to NTA of not more than 1.25:1.0 times as of March 31, 2007, in compliance with its financial covenants.

For the three-month period ended 30 June 2007 (1Q2008), the Group recorded a revenue of RM792.0 million, slightly higher than the 1Q2007’s revenue of RM777.3 million. Pre-tax profit which improved by RM34.4 million to RM63.8 million compared to 1Q2007, was bolstered by stronger performances of the Group’s automotive and property & construction sector operations and a gain on disposal of an associated company. The interim results indicate marginal strengthening in capital structure on account of profit retention and a further decline in debt levels.

Major Rating Factors

Strengths

- Good business positions in its key operating segments of automotive, property and construction as well as services i.e. Alam Flora and PUSPAKOM

- Improving profitability and cash flow despite the challenging environment for domestic automotive, and

- Stable revenue and profit contributions from the services division.

Challenges/Risks

• Stiff competition in the domestic automotive industry;
• Cyclical nature of the construction and property industry;
• Possible changes in the Group’s business as well as financial risk profile upon the completion of announced corporate initiatives