KUALA LUMPUR: PublicInvest Research is retaining Outperform call on DRB-Hicom with an unchanged sum-of-parts target price of RM1.26.
It said on Tuesday the diversified group's unit Proton Holdings had proposed to issue 1.25 billion new redeemable convertible cumulative preference shares (RCCPS) to GOVCO Holdings, a 99.99%-owned by Minister of Finance (MOF).
The subscription of the new RCCPS will raise a total cash of RM1.25bil at an issue price of RM1 per share. The RCCPS has a cumulative annual preferential dividend rate of 4.0%.
“We understand that the proceeds will be used to settle the outstanding balances payable to Proton Group’s creditors, vendors and suppliers.
“We are positive on this as we believe it can help to regularise the cash flow of Proton in during a challenging operating environment at its auto segment and accelerate the turnaround process at Proton,” it said.
PublicInvest Research said the corporate exercise is expected to be completed by Tuesday.
Proton needs to seek and identify a strategic and renowned partner who will assist in research and development to become a competitive player in automotive industry at the international level within a year.
It said Proton will utilise the proceeds of RM1.25bil to settle the outstanding balances payable to Proton Group’s creditors, vendors and suppliers.
“As at March 2015, Proton has a total borrowing of RM1.7bil, which accounted for 24% of DRB-Hicom’s total debt. The proposed issuance will reduce DRB-Hicom’s FY16 net gearing from 0.88 times to 0.58 times.
“We are positive on this as we believe it can help to regularise the cash flow of Proton during a challenging operating environment at its automotive segment and accelerate the turnaround plans at Proton.
“The RCCPS is expected to yield at 4.0%, which is fair in our opinion, as current cost of debt for the group is ranging from 4% to 7%.
“On the assumption that GOVCO converts the entire 1.25bn RCCPS and dividend declared of RM574mil into new Proton shares at the end of the tenure (up to 15 years), DRB-Hicom’s shareholdings in Proton is expected to be diluted from 100% to c.20.72%, on the conversion basis of 1.152 new Proton shares for every one RCCPS,” it said.
DRBHCOM (1619) - PublicInvest Research retains Outperform call on DRB-Hicom