View Credit Analysis Report (605229)

SubcategoryTrading/Services - Conglomerates
Date Article2020-08-14 00:00:00
MARC has affirmed its ratings of A+IS and A-IS on DRB-HICOM’s Sukuk Programme of up to RM3.5 billion and Perpetual Sukuk Musharakah Programme of up to RM2.0 billion. The ratings outlook has been revised to stable from positive.

The affirmed senior sukuk rating is underpinned by our view that DRB-HICOM is better placed to withstand the impact from the COVID-19 pandemic on its fairly diverse business segments. Its healthy liquidity position would support its near-term financial obligations and funding requirement while a moderate leverage position provides some headroom for borrowings if necessary. The rating also reflects the group’s outstanding government defence contract and moderate recurrent earnings from concession assets that support earnings visibility that has been recently affected by the weaker performance of the group’s core business segment of automotive sales. The two-notch rating differential between the Perpetual Sukuk and the senior sukuk is in line with MARC’s notching principles on hybrid securities.

The revised outlook to stable from positive incorporates MARC’s view on the challenging outlook for the domestic automotive industry. The movement control order (MCO) imposed after the COVID-19 outbreak at end-March 2020 has dented consumer sentiment against a backdrop of weakening economic conditions. Nonetheless, auto sales volume has slightly picked up in recent months after a sharp fall in April. Domestic total industry volume (TIV) is now expected to decline by a slower pace of 22% in 2020 compared to the earlier anticipated 34% reduction at the onset of the crisis. DRB-HICOM remains a key player in the domestic automotive industry with an improved market share of 35.2% of total sales volume for 5M2020 (2019: 32.3%).

The market share improvement has been on the back of a sustained turnaround of its main operating subsidiary, Proton Holdings Berhad (Proton) which recorded profit for the first time in the last seven years in 2019. MARC continues to view DRB-HICOM’s partnership with China automaker Zhejiang Geely Holding Group (Geely) in Proton as positive for the group. The turnaround, along with DRB-HICOM group’s improved metrics, were the main factors that had prompted MARC to place the ratings on a positive outlook in December 2019 with a view for an upgrade; the recent challenges posed by the pandemic have forestalled this action.

For 1Q2020, largely due to weaker car sales, the group registered adjusted pre-tax losses of RM73.5 million; near-term profitability could remain constrained although recent government measures to provide vehicle sales tax exemption may incentivise buyers. Over the next two to three years, the group’s outstanding RM1.0 billion government defence contract would provide steady cash flow while its concession assets would provide a moderate but stable earnings stream. Its other key subsidiary POS Malaysia Berhad which has faced competitive pressures has shown some performance improvements, driven by a surge in demand for courier services and the recent tariff revision for commercial postal rates in February 2020.

MARC notes that the group’s liquidity position with unrestricted cash balance of RM1.8 billion is more than sufficient to meet the group’s upcoming obligations of RM802.0 million which include the planned redemption of a portion of its perpetual sukuk amounting to RM225.0 million by year end. Near-term liquidity will be further supported by proceeds from ongoing land sales of RM289.0 million which are expected to be received by end-2020. We also understand that any contribution to Proton, if required, will be up to a maximum of RM225.0 million, which continues to reflect the substantially reduced reliance on the holding company to fund the latter’s operations and capex.

The stable outlook is premised on MARC’s expectation that the group would be able to weather the fallout from the pandemic in the near term. Should the group regain its performance momentum and maintain its credit profile, the rating/outlook could be upgraded. Conversely, the rating would come under pressure if group performance is dragged down by a slower-than-expected pace of, and/or lack of depth in economic recovery.

Major Rating Factors

Major domestic automotive player;
Turnaround in Proton’s performance;
Strong liquidity position and moderate recurrent earning streams from 
        concession assets; and 
Sizeable landbank a source of financial flexibility.

Managing business segments from the impact from pandemic; and
Strengthening competitive position of postal service segment.

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