DRB-Hicom’s divestment plan a positive move, say analysts

KUALA LUMPUR: Analysts are positive on the announcement on DRB-Hicom partially divesting Proton and fully divesting Lotus, which are loss making and capital intensive.

Hong Leong Investment Bank (HLIB) Research in its note yesterday said in the financial year 2016 and 2017, Proton made a loss of RM1.5 billion and RM1 billion respectively, while Lotus recorded a loss of RM267 million and RM68 million, respectively.

HLIB said immediate benefits to DRB-Hicom include retaining part of Proton’s valuable non-core assets including the Shah Alam land and 40 per cent stake in Proton City, as well as cash proceeds of £100 million (RM560 million) from the Lotus disposal.

Besides that, it said Proton would be able to leverage Geely for turnaround, which will partially relieve the burden on DRB-Hicom, while DRB-Hicom could refocus its resources on other strategic businesses.

It said Proton’s immediate working capital would be financed by RM170 million proceeds from Geely, remaining RM250 million Redeemable Convertible Preference Shares (RCCPS) from the government and RM1.1 billion grant for research and development from the government.

HLIB has maintained its “buy” call on DRB-Hicom with a higher target price of RM2.58 from RM2.22, previously.

“With the emergence of Geely as a strategic foreign shareholder for Proton, we can expect rerating catalyst on DRBHicom’s valuation,” it said.

Besides that, Public Investment Bank Research in its note yesterday said it viewed the deal as necessary and sensible.

It said following the agreement, Proton’s turnaround plans will be accelerated, while a major overhang on DRB-Hicom’s valuation was potentially removed.

“Our neutral call is retained.

“However, the removal of this large overhang should continue to encourage fervent trading interest in the stock in the near term,” it said.

It has retained it “neutral” call on DRBHicom, lifting its target price to RM1.82 from RM1.31. DRB-Hicom closed four sen higher yesterday at RM1.72.

With the emergence of Geely as strategic foreign shareholder for Proton, we can expect re-rating catalyst on DRBHicom’s valuation.