DRB-HICOM BERHAD - 2019

MARC has assigned a final rating of A+_IS to DRB-HICOM Berhad’s proposed Islamic Medium-Term Notes Programme (Sukuk Programme) with a nominal value of up to RM3.5 billion. The rating outlook is positive. Concurrently, MARC has affirmed its ratings of A+_IS and A-_IS on DRB-HICOM’s existing Islamic Medium-Term Notes (IMTN) Programme of up to RM1.8 billion and Perpetual Sukuk Musharakah Programme of up to RM2.0 billion. The ratings outlook on the existing programmes has been revised to positive from stable.  

The bulk of the proceeds from the Sukuk Programme will be used to refinance its existing IMTN and some of its borrowings and redeem its perpetual sukuk on call dates. On balance, DRB-HICOM’s total borrowings would remain unchanged over the medium term but its borrowings maturity profile would improve. The ratings affirmation mainly reflects DRB-HICOM’s strong market position in the domestic automotive industry, its moderately diversified business profile that includes concession-based operations and its earning generation capabilities.   

The outlook revision to positive considers DRB-HICOM’s improved consolidated credit profile through streamlining businesses by divesting investments and non-core assets and in improving operating margins and strengthening liquidity position. Should DRB-HICOM continue to improve its performance such that OPBITDA interest cover is able to sustain above 3.0 times while leverage position as reflected by adjusted gross debt-to-equity is about 0.7 times, the rating agency could upgrade the ratings by mid-2020. However, if the group’s financial performance reverses its uptrend and/or any sizeable debt-funded acquisition is undertaken, resulting in weakening debt metrics, the outlook could be revised to stable. 

MARC notes that the strategic partnership between DRB-HICOM’s major subsidiary Proton Holdings Berhad and China automaker Zhejiang Geely Holding Group (Geely) has yielded positive results for the group. This was evident in the strong response to the launch of X70 SUV model in December 2018. This contributed to an 8.9% y-o-y increase to 70,182 Proton vehicles sold during the financial year ended March 31, 2019 (FY2019). As a result, Proton Holdings recorded a 16.5% y-o-y increase in revenue to RM3.9 billion and narrowed pre-tax loss to RM482.8 million (FY2018: loss of RM1.3 billion, excluding a one-off gain of RM1.1 billion). MARC expects Proton Holdings to sustain the improvement in its financial performance over the medium term as sales are expected to be further supported by the facelifted Saga, Iriz, Exora and Persona models, although the competitive pressures in the domestic automotive industry could limit any significant upside on sales volume.  

DRB-HICOM’s investment requirement to support Proton Holdings is expected to reduce substantially going forward. DRB-HICOM and Geely have provided proportionate capital contribution to fund a substantial portion of the   RM900.0 million of a planned RM1.2 billion for the assembly facilities in Tanjung Malim to 

assemble among others the X70 model on a completely knocked down (CKD) basis. For Proton’s immediate capex requirement, the group has earmarked a part of the proceeds from the disposal of Alam Flora which is expected to generate approximately RM900 million in cash.   

The group’s automotive operations, including by Honda Malaysia Sdn Bhd, have remained stable, enabling the group to maintain significant domestic market share of the total industry volume; this stood at 33.1% as at end-August 2019. Its other businesses include supplying armoured military vehicles under government contracts and manufacturing components for aircraft manufacturers which provide recurrent earnings. This will be further supported by contributions generated by two government concessions namely the new immigration and customs complex in Bukit Kayu Hitam and the new broadcast system development at Angkasapuri (Media City). 

Its other key subsidiary POS Malaysia registered pre-tax loss of RM158.4 million in FY2019 owing mainly to a one-off expense of RM103.0 million and losses in its traditional postal services segment. MARC understands POS Malaysia is negotiating with the government for an increase in postal tariffs and other operational adjustments to manage operating costs.  

For 1QFY2020, group pre-tax profit improved to RM146.7 million as compared to a loss of RM94.4 million in the previous corresponding period with the turnaround stemming mainly from the improved performance of Proton Holdings. For FY2019, it recorded a pre-tax profit of RM281.9 million (FY2018: pre-tax operating losses of RM220.7 million). Excluding Proton Holdings, DRB-HICOM would generate a healthy OPBITDA of RM1.4 billion, up from RM1.0 billion three years ago, reflecting the steady growth of other subsidiaries. The rating agency expects Proton Holdings to meet its own debt obligations largely without relying on DRB-HICOM, its holding company. Excluding borrowings at Proton Holdings, adjusted DE is expected to trend at around 0.7x which the group is expected to adhere to. 

Liquidity position remains strong with cash balance of RM2.5 billion as at end-FY2019. Its liquidity position would also be supported by proceeds from the planned disposal of its 2,268 acres of land and investments in leisure property assets which would generate RM288.7 million cash and receipt of 1,243 acres of industrial land parcels in Johor. These also provide additional sources of financial flexibility. 

Major Rating Factors

Strengths

• Significant market position in the domestic automotive industry;
• Leading position in the courier services segment;
• Sizeable landbank provides source of financial flexibility; and
• Recurrent earning stream and healthy liquidity position.

Challenges/Risks

• Challenging domestic automotive industry; and
• Sustaining Proton’s turnaround.