DRB-Hicom’s AFSB divestment to impact earnings
KUCHING: DRB-Hicom Bhd’s ( DRB- Hicom) divestment in Alam Flora Sdn Bhd (AFSB) is expected to impact the group’s earnings from the financial year 2020 ( FY20) onwards despite the savings on its interest cost.
AmInvestment Bank Bhd’s research team (AmInvestment) in its notes said with the disposal, DRB-Hicom will no longer benefit from AFSB’s contribution of circa RM100 million annually to the group’s earnings.
“We believe that this will negatively impact the group’s earnings from FY20 onwards after the completion of the exercise despite extracting savings on its interest cost,” it added.
Nevertheless, it pointed out that following the disposal, RM500 million of the sales proceeds will be used to reduce the group’s debt levels with the remaining RM444.6 million utilised for capex to turn around Proton.
The transaction is expected to result in an estimated net gain of RM735.4 million.
“On the positive aspects, the group’s debt levels will be reduced. Hence, this will lower the group’s finance costs by RM30 million based on an estimated six per cent annual interest rate,” it added.
Meanwhi le, on the sales performance of Proton X70 CBU units, the research team highlighted that contributions have started to materialise and this will be reflected in the following quarter’s results.
“However, we believe that the X70 will not significantly turn around the automotive segment’s profitability as yet in FY19. Nevertheless, it will reduce the inherent volatility in DRBHicom’s earnings,” it added.
Aside from that, it noted that key re-rating catalysts for the stock include substantial improvement in Proton’s profitability, and the possible future success of its export sales in the Southeast Asian region as profit margins for international sales are higher than that of domestic.
“We believe that the group should build a captive market for the X70 ahead of its localisation for Proton to be profitable in both its domestic and export sales,” AmInvestment highlighted.
All in, the research team maintained a ‘hold’ call on the stock.