Khazanah sells stake to DRB-HICOM

KHAZANAH Nasional Bhd, the country’s sovereign wealth fund, ended
months of speculation after deciding that it will sell its 42.74 per cent stake in Proton Holdings Bhd to DRB-HICOM Bhd.


Khazanah will sell the stake to DRB-HICOM for RM1.29 billion, or RM5.50 a share, representing a 6 per cent premium over the last
traded price of RM5.18.

Upon completion of the acquisition, DRB-HICOM will be obliged to undertake a mandatory general offer for the remaining Proton shares. This would cost the group another RM1.7 billion if it plans to buy these shares for RM5.50 each.

The offer values Proton at 24 times estimated earnings for next fiscal year, Bloomberg data revealed.

The move is part of Khazanah’s plan to help boost stock market

liquidity and attract investors.

Khazanah has disposed of minority stakes in companies including
DRB-HICOM, CIMB, Malaysia Airports Holdings Bhd and Telekom Malaysia Bhd.

“This is another significant milestone in our strategic divestment programme as it represents the largest size to date.

The divestment is a furtherexample of public-private partnerships, whereby strategic divestments are made with the aim of putting government-linked companies on a stronger and more competitive footing,”said Khazanah managing director Tan Sri Azman Mokhtar in a statement.

Proton, once the largest carmaker in the country, could be a beneficiary of the take over if DRB-HICOM has a solid plan to optimise Proton’s production facilities.

A better utilisation of the facilities would mean better earnings for Proton – which has posted two annual net losses over the past five years.

“There are a lot of synergies that could be gained between DRB-HICOM and Proton.

Should DRB-HICOM bring Volkswagen (VW) into its stable, there could be avenue for Proton to be a contract manufacturing
assembly partner.

This could make Malaysia the Asia hub for VW and help optimise Proton’s facilities,” said OSK Research analyst Ahmad Maghfur Usman.

Although the acquisition may raise concerns about DRBHICOM’s
net gearing, analysts believe it could help the group in the long run as DRB-HICOM shareholders would be able to see higher earnings when it successfully turns around Proton.

“This will not happen overnight, one needs to have a long-term view on this,” said Ahmad Maghfur.

The acquisition gives DRB-HICOM control of Proton's two car plants with combined capacity of 350,000 vehicles annually - about 58 per cent more than the total number of cars sold in Malaysia last year.

DRB-HICOM, controlled by Tan Sri Syed Mokhtar Al-Bukhary, currently distributes and assembles cars for Volkswagen AG and Daimler AG's Mercedes-Benz. It has four assembly plants, three at the integrated assembly complex in Pekan, Pahang, and the Honda plant in Malacca. It also has four motorcycle assembly plants for Modenas, Honda, Yamaha, and Suzuki.

While returning Proton into its glory days may seem difficult, analysts believe that it is not impossible.

"A few hard decisions would need to be made ... First is the reduction of capital expenditure (capex). For a company that produces less than a quarter million of vehicles, having over RM1 billion in capex is not viable. DRB-HICOM may also look at Proton's dealer network ... there's a chance that dealership may be reduced further," said an analyst from a foreign brokerage.

Since the past two months, Proton shares have almost doubled. It was traded at RM2.70 two months ago.

For a company that produces less than a quarter million of vehicles, having over RM1 billion in capex is not viable.