MARC has affirmed its ratings of A+IS and A-IS on DRB-HICOM Berhad’s (DRB-HICOM) Islamic Medium-Term Notes (IMTN) Programme of up to RM1.8 billion and Perpetual Sukuk Musharakah Programme (Perpetual Sukuk) of up to RM2.0 billion. The two-notch rating differential between the Perpetual Sukuk and the IMTN is in line with MARC’s notching principles on hybrid securities. 

The ratings outlook is maintained at stable. MARC has observed an improving trend in DRB-HICOM group’s consolidated credit profile through concentrated efforts in reducing leverage and improving liquidity that has seen total borrowings declining to RM5.79 billion as at end-June 2018 (1QFY2019) from RM6.8 billion at end-FY2016. This has resulted in the net adjusted debt-to-equity ratio (DE) falling to 0.46x from 0.68x during the period. Additionally, part of the proceeds from the impending disposal of concessionaire Alam Flora Sdn Bhd for RM944.6 million will be utilised to further pare down its borrowings. The improvement is on the back of groupwide restructuring efforts through asset disposals of non-strategic subsidiaries to increasingly position itself as a major automotive and logistics player. 

Notwithstanding the improvement, the ratings/outlook are being maintained at the current level mainly due to the still ongoing challenges in the group’s automotive segment. This segment, which contributed 53% to revenue for the first quarter ending June 30, 2018 (1QFY2019), has continued to register operating losses. Its 50.1%-owned subsidiary Proton Holdings Berhad (Proton) remains a drag on group performance, registering losses of RM134.6 million in FY2018 on a continued decline in sales volume and competitive pricing pressure. DRB-HICOM’s associate automotive companies, mainly Honda (M) Sdn Bhd, have partly offset the losses in the automotive segment. MARC views the group’s operating profit would remain weighed down by the challenging outlook for the automotive sector attributed to a weaker economic growth forecast. 

Proton car sales registered an 11.0% y-o-y decline to 64,459 units in FY2018 but sales are expected to be boosted by the launch of an SUV model for which it has received bookings of about 10,000 units to date. The production of the vehicle, along with two other planned models will require additional investments in Proton’s production facilities over the near to medium term for which DRB-HICOM and its partner in Proton, Zhejiang Geely Holding Group, will make proportionate contributions. The performance of the group’s non-Proton marques such as Honda remained commendable, allowing DRB-HICOM to maintain its overall domestic market share of 36.3% of the total industry volume of 570,935 units for FY2018. 

DRB-HICOM also benefits from long-term contracts comprising the outstanding RM2.1 billion armoured military vehicles contract with the government and RM9.3 billion aerospace component manufacturing contract with aircraft manufacturers. The group’s recurrent earnings stream is also boosted by its two recent government concessions related to the new immigration and customs complex in Bukit Kayu Hitam and the new broadcast system at Angkasapuri. The group’s aviation and courier businesses, consolidated under Pos Malaysia Berhad, have continued to grow. However, the postal company’s earnings have been hampered by losses in the traditional postal services segment, registering pre-tax losses of RM6.0 million in 1HFY2019 (1HFY2018: pre-tax profit of RM67.7 million). Over the near term, the group aims to strengthen its integrated logistics infrastructure. 

For 1QFY2019, DRB-HICOM registered revenue of RM2.7 billion and pre-tax losses of RM94.4 million (FY2018: RM12.8 billion; pre-tax profit of RM415 million). The FY2018 profitability stemmed from the receipt of a research & development grant of RM1.1 billion; excluding the grant, DRB-HICOM would register pre-tax losses of RM685 million. Going forward, the turnaround of DRB-HICOM’s group performance would hinge on a substantial improvement in Proton’s sales volumes.  

The group has a strong liquidity position with cash balance of RM2.75 billion as at end-1QFY2019. Its liquidity position would also be supported by proceeds from the planned disposal of its 2,200 acres of land and investments in leisure property assets. In return for the disposal, the group would receive 1,200 acres of industrial land parcels in Johor and cash proceeds of RM288 million which would provide an additional source of financial flexibility. 

The stable outlook reflects MARC’s expectation that DRB-HICOM’s credit metrics would remain commensurate with its current rating band. An upward outlook/rating revision would be considered if DRB-HICOM continues to demonstrate a sustainable improvement in its consolidated financial performance, particularly its profitability and cash flow metrics.