PROTON (FV RM5.50 - NOT RATED) Discontinuing Coverage: The End of a Saga

The End of a Saga

Shareholders of DRB-HICOM  (NOT RATED) approved the acquisition of  a substantial stake in  Proton from existing shareholder, Khazanah,  at the EGM yesterday. Subsequently,  DRB will be obliged to extend a MGO  for all the remaining shares not already owned by it after the initial acquisition  at the offer price of RM5.50,  which we deem fair and reasonable. We remain skeptical on Proton’s turnaround and the kind of profits it could chalk up after DRB’s takeover, but in all fairness, its aggressive  cost  cutting shows  that DRB is serious in bringing  about  change by revamping the management.  With the Proton saga coming to an end, we are discontinuing coverage on Proton and looking forward to initiating on DRB soon.

Shareholders give nod.  Shareholders of DRB-Hicom (NOT RATED) have approved the acquisition of Proton from  Khazanah,  at the company’s EGM yesterday. The takeover exercise will be completed in the next 7 days. DRB had proposed to take over Proton by acquiring Khazanah's 42.74% stake at RM5.50 per share. Subsequently, in compliance  with the Malaysian Code on Takeovers and Mergers 2010, DRB will be obliged to extend a MGO for all the remaining shares not already owned by DRB at the same offer price. We deem the offer price fair and reasonable. The said offer price is still at a premium to our adjusted NTA per share of RM5.34 on incorporating a 100% writedown in inventory  as well as Lotus and a revaluation surplus on the Shah Alam landbank. We are of the view that at RM5.50 per share, DRB may have factored in some asset write-downs, given the fact that the capacity at Proton’s plants is only half utilized. Note that DRB does not intend to maintain Proton’s listing.

Long gestation but  longer term  optimistic. We remain skeptical on Proton’s turnaround and  the kind of profits it can make after  DRB’s takeover. Staff morale has been hit by rumors of the potential acquisition, which essentially does not bode well for vehicle sales, until there is more certainty on job security. DRB has been cutting costs in all areas and has indicated  that it would further rationalize  the vendors Proton outsources from. That said, we see a long gestation period as this will involve revamping a supply chain  of more than 250 vendors, with an estimated 32 of the Proton vendors being  Tier 1 suppliers/system integrators, and the rest, tier 2 or tier 3 suppliers, supplying  more than  4,000 components. We reckon the rationalization of  the  vendor network  alone could take at least  a  year, considering that new production lines  also need to be set up.  Similarly, the dealership  network will also be  trimmed to prevent geographic  overlapping. In all fairness,  these measures  prove that DRB is serious in bringing  about  change by  putting in place a new management team (with some old Proton faces too), which would be a mid to long term positive.   

Source: OSK188