CREDIT ANALYSIS REPORT

DRB-HICOM BERHAD - 2016

Report ID 5319 Popularity 1791 views 41 downloads 
Report Date Sep 2016 Product  
Company / Issuer DRB-Hicom Bhd Sector Trading/Services - Conglomerates
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Rationale

MARC has downgraded its rating on DRB-HICOM Berhad’s (DRB-HICOM) Islamic Medium-Term Notes (IMTN) Programme of up to RM1.8 billion to A+IS from AA-IS. Concurrently, the rating agency has lowered the rating on the Perpetual Sukuk Musharakah Programme (Perpetual Sukuk) of up to RM2.0 billion to A-IS from AIS. The outlook on all ratings has been revised to stable from negative. The rating actions affect the outstanding RM1.73 billion IMTN and RM1.04 billion perpetual sukuk under the respective programmes.

The two-notch rating differential between the senior debt and perpetual sukuk is in line with MARC’s rating approach on perpetuals which, among other factors, takes into consideration the absence of other senior subordinated debts to the perpetual sukuk and the minimal risk of dividend deferral on the perpetual sukuk.

MARC’s action to downgrade DRB-HICOM’s senior debt rating was precipitated by the group’s weakened credit metrics that are more in line with the lower rating band. The continued losses of its wholly-owned automotive subsidiary Proton Holdings Berhad (Proton) remains a major drag on DRB-HICOM group’s consolidated credit profile. The national carmaker has been facing considerable challenges in recent years to address the decline of its car sales and regain its competitive position in the automotive industry. In this regard, DRB-HICOM has extended substantial financial support to Proton by way of advances to meet capital expenditure. MARC notes that in addition to the acquisition costs of Proton, the bulk of proceeds under the rated programmes has been utilised to finance the national carmaker’s operations.

For the financial year ended March 31, 2016 (FY2016), Proton recorded an operating loss of RM1.46 billion on the back of a 15% year-on-year (y-o-y) decline in sales volume to 95,690 units. While MARC regards any meaningful turnaround for Proton over the near term to be challenging given the current tough environment for domestic automotive players, the national carmaker’s launch of two new car models this year in addition to the new Perdana and Persona model launches in June and August respectively could better position it to improve its sales performance. In addition, the recent move by the government to support Proton through full subscription of the RM1.25 billion redeemable convertible cumulative preference shares (RCCPS) has significantly eased Proton’s working capital pressures, particularly on its sizeable trade payables, which stood at RM1.33 billion as at end-FY2016. The government is expected to subscribe to the balance RM250 million RCCPS over the near term. MARC views the RCCPS subscription to reduce Proton’s immediate reliance on DRB-HICOM for funding.

Meanwhile, as a condition stipulated by the government to subscribe to the RCCPS, Proton is expediting a search for a foreign strategic partner (FSP) to support its turnaround plans. MARC understands that an FSP agreement will be finalised by end-FY2017. Notwithstanding Proton’s weak performance, DRB-HICOM’s market position in the automotive industry has remained strong, accounting for 33.6% of total industry volume of 629,596 units sold for FY2016 (FY2015: 33.7%). Its Honda marque under associate Honda Malaysia Sdn Bhd registered a 9.0% y-o-y increase to 91,534 units. The automotive division’s overall performance has also been supported by the outstanding RM3.8 billion defence contract under DRB-HICOM Defence Technologies Sdn Bhd (DEFTECH) to manufacture 257 units of armoured vehicles. DEFTECH’s 96.9%-held subsidiary Composite Technology Research Malaysia Sdn Bhd has a sizeable order book of RM11.9 billion that would provide some earnings visibility over the medium term.

DRB-HICOM’s services division, as represented mainly by POS Malaysia Berhad (POS Malaysia) and Bank Muamalat Malaysia Berhad (Bank Muamalat), has registered moderate performance for the first quarter ended June 30, 2016 (1QFY2017). The proposed injection of its subsidiary KL Airport Services Sdn Bhd into POS Malaysia will result in DRB-HICOM increasing its stake in POS Malaysia to 53.5% from 32.2%. The consolidation of the debt-free POS Malaysia will improve the group’s capital position and earnings profile. DRB HICOM’s other services operations, namely government concessions for public cleaning (Alam Flora Sdn Bhd) and vehicle inspection (PUSPAKOM Sdn Bhd), continue to provide modest earnings.

At end-1QFY2017, DRB-HICOM’s adjusted consolidated leverage (excluding Proton’s RCCPS) declined marginally to 0.91 times from 0.93 times at end-FY2016 following a debt repayment of approximately RM300 million, bringing its total consolidated debt to RM7.1 billion (FY2016: RM7.4 billion). Of this, the major borrowings are related to DEFTECH (RM2.8 billion), holding company (RM2.5 billion), and Proton (RM1.3 billion). Proton’s borrowings largely comprise the outstanding RM840 million term loan which has an annual repayment of approximately RM260 million; Proton’s cash balance of RM340 million as at end-FY2016 is sufficient to meet the next repayment. In the case of DEFTECH, proceeds from government contracts are ring-fenced to meet the majority of its debt obligations.

At the holding company level, DRB-HICOM has earmarked the net proceeds of RM400 million from the impending disposal of The Verge shopping mall in Singapore towards paring its debt. The holding company would continue to rely on HICOM Holdings Berhad and Honda Malaysia Sdn Bhd for the bulk of its dividend income. Therefore, the dividend payment restriction on Proton for the next five years under the RCCPS subscription terms would have minimal impact on the holding company. For FY2017, the holding company has projected to receive RM324.4 million in dividend income and net advances from subsidiaries of approximately RM605.7 million which will be sufficient to meet its near-term obligations.

The stable outlook reflects MARC’s expectations that DRB-HICOM’s credit profile will be supported by its moderate earning stream and adequate liquidity position. Downward rating pressures and/or outlook revision would arise if its financial metrics decline due to weaker-than-expected performance of its automotive segment, particularly if it falls short of sales targets and/or from undertaking any debt-funded acquisitions that would worsen its leverage position.

Major Rating Factors

Strengths

  • Established market position in the domestic automotive industry; and
  • Moderately diversified profile through concession assets, logistics business and property projects.

Challenges/Risks

  • Challenging prospects for the domestic automotive industry; and
  • Key automotive subsidiary continued to face financial losses.
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