Auto synergy

The proposed take over by DRB Hicom of national car maker Proton Holdings Bhd. hit the mainstream business news the past two week.

Saturday December 3, 2011

Proton subject of takeover talks again, share price goes up sharply

By THOMAS HUONG
huong@thestar.com.my

SPECULATIONS that Proton Holdings Bhd is once again a subject of a takeover or a management buyout persisted as the share price of the national auto maker spiked on Friday, rising to a nine-month high at 51 sen to RM3.61 a share.

In a recent report, UOB Kay Hian Research reckoned that there was some truth to market talks about Proton’s impending takeover, after seeing the group’s “somewhat” bullish share price over the past two weeks. Then there was news about the recent consolidation in the automotive industry where MBM Resources Bhd bought Hirotako Holdings Bhd. Also in the spotlight was the ongoing reforms by Government-linked companies which saw MISC Bhd‘s move to exit its liner or container shipping service.

The Government’s investment holding arm, Khazanah Nasional Bhd, has a 42.74% stake in Proton, while the Employees Provident Fund (EPF) and Petroliam Nasional Bhd (Petronas) have stakes of 10.78% and 7.85% respectively.

In the past, conglomerates such as Naza Group and DRB-HICOM Bhdhave been linked to potential deals involving Proton.

UOB Kay Hian Research said DRB-HICOM was the most compelling candidate, and could pay as much as RM8 per share for a 30% stake in Proton.

“Our optimistic case RNAV (revised net asset value) for Proton is at RM5.80 per share, which takes into account an optimistic valuation of loss-making subsidiary Group Lotus at RM1bil, based on an old speculated bid by a Chinese investor. This also factors in a high seven times PE (price-earnings ratio) for Proton’s domestic operations,” says UOB Kay Hian Research.

The research house says the rationale for an acquisition of Proton could include a more efficient use of the group’s cash resources, a disposal of Group Lotus, utilising Proton’s spare production capacity or vast empty industrial landbank in Tanjung Malim, Perak by negotiating with multinational car producers looking to diversify some production from Thailand.

An acquisition can also realise the value of Proton’s valuable landbank at its Shah Alam factory by consolidating production at Tanjung Malim which can increase Proton’s valuation by up to RM549mil or RM1 per share.

It should be noted that Proton has denied recent reports speculating that it might be looking at selling a stake in Group Lotus, which was in the midst of a five-year turnaround exercise.

On Tuesday, Proton group managing director Datuk Seri Syed Zainal Abidin Syed Mohamed Tahir also dismissed talks that there was an impending MBO.

Syed Zainal said: “I am not aware of anything. This is a shareholding issue.”

OSK Research said it preferred not to speculate about the rumours “as again, disappointments may be in store” although DRB-HICOM could be preferred as “Volkswagen’s production line-up could be injected into the Proton facility in Tanjung Malim to establish a production hub for the Asean market.”

Meanwhile, Proton’s management is optimistic about Lotus becoming profitable as early as 2013 given the strong demand for its model line-up in China, said OSK Research.

Proton chairman Datuk Seri Mohd Nadzmi Mohd Salleh says to date, Lotus China’s book order has exceeded 300 units.

“With more showrooms to be opened across China, Lotus is confident of its sales volume increasing further,” he says in a statement.

The group is aiming to set up 15 Lotus showrooms in China next year, after opening Lotus China’s first showroom in Beijing last month.

In October, Lotus also secured a 10.4mil (RM51.3mil) grant from the British government to help create jobs as well as build a second factory and vehicle assembly line in England.

Group Lotus has continued to be a major drag on Proton’s earnings after the national carmaker recently posted a steep drop in net profit for a second consecutive quarter.

Proton’s net profit had plunged 86.6% year-on-year to RM20.1mil for its first financial half ended Sept 30 compared with a RM150.6mil net profit a year earlier, while revenue was slightly lower year-on-year at RM4.497bil compared with RM4.5bil a year earlier.

However, research analysts were less optimistic about the turnaround exercise for Lotus.

In a note, JF Apex Securities said: “We believe that Lotus is on track to strike a rebound, but the turnaround is going to take another four to five years.”

Meanwhile, Maybank Investment Bank pointed out that Proton’s “big picture” remained cloudy.

“Lotus’ turnaround would take until 2014 to realise, during which time, its losses will offset positive contributions from Proton’s domestic operations and drain cashflow.”

Maybank Investment Bank noted that for the recently concluded second financial quarter, Lotus remained in the red with lower revenue of RM15mil (a drop of 9% quarter-on-quarter).

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Proton Adviser Tun Dr Mahathir Mohamad explained that the need for new shareholders lie on the ability to inject much needed fresh capital. Proton needs in the neighborhood of RM 2 billion cash to develop new products and invoke new technology, for the company to remain relevant and sustainable.

The bet amongst punters is now with DRB Hicom. Tun Dr Mahathir did insinuate that DRB Hicom’s proposal is the best on the table, so far.

Bloomberg

Billionaire Syed Mokhtar Gets Mahathir Support to Buy Proton

December 13, 2011, 9:12 PM EST

• By Chong Pooi Koon

(Updates share prices in fifth paragraph.)

Dec. 13 (Bloomberg) — Syed Mokhtar Al-Bukhary, Malaysia’s second-youngest billionaire, received former Prime Minister Mahathir Mohamad’s endorsement to acquire a controlling stake in automaker Proton Holdings Bhd.

DRB-Hicom Bhd., Syed Mokhtar’s auto assembler, is the best candidate to buy the government’s 43 percent stake in Proton, Mahathir, now an adviser at the carmaker he founded in 1983, said in a joint interview yesterday in Putrajaya, outside Kuala Lumpur. Officials at DRB and Khazanah Nasional Bhd., the government investment arm holding the Proton shares, weren’t immediately available to comment.

The support of the man who was Malaysia’s prime minister for two decades indicates DRB’s purchase of the stake — valued at 993 million ringgit ($314 million) at current prices — is imminent because of the former premier’s lingering influence, according to James Ratnam, an analyst at TA Securities Holdings Bhd. Proton would add the owner of the Lotus sports car brand to Syed Mokhtar’s business empire, which includes ports, airports and power plants.

“Mahathir’s view and approval would be sought by Khazanah if it wants to sell Proton,” said Ratnam, an analyst in Kuala Lumpur. “He is the adviser and founder of Proton, the company is still very close to his heart even as he has retired.”

Proton advanced 1 percent to close at 4.27 ringgit in Kuala Lumpur today, extending its lead as the best performer on the FTSE Bursa Malaysia 100 Index in the past month to 58 percent. DRB-Hicom was unchanged at 2.12 ringgit.

General Offer

Should DRB seek to buy a 43 percent stake, it would be obliged to make a general offer for Proton’s remaining shares under Malaysian acquisition rules.

Syed Mokhtar, 60, is the Southeast Asian nation’s second- youngest billionaire after Berjaya Corp. Chairman Vincent Tan, according to Forbes magazine’s latest rankings. His ties to Mahathir, who describes the Malaysian tycoon as a friend, stretch back more than a decade. About a year before Mahathir stepped down in 2003 as prime minister, he awarded a $3.8 billion rail project — then the nation’s biggest infrastructure undertaking — to contractors including Syed Mokhtar’s MMC Corp.

DRB would be able to consolidate and expand its share of Malaysia automotive market with a Proton acquisition, TA Securities’ Ratnam said. DRB manufactures, distributes and assembles a range of vehicles from motorcycles to garbage trucks for brands including Suzuki, Mercedes-Benz and Yamaha. It has eight assembly plants of which four are for cars, including one in Malaysia’s southern Malacca state where Hondas are made.

Volkswagen Partnership

Selangor-based DRB began manufacturing its first Volkswagen AG Passat vehicles several weeks ago after signing a partnership agreement with the German carmaker last year.

Proton, whose vehicles are driven by taxi drivers across Malaysia, are among the cheapest cars sold in the country. The company, which had two annual net losses over the past five years, is poised to see its profit fall 51 percent in the year ending March, according to the average of 13 analyst estimates compiled by Bloomberg.

Proton has been looking for a strategic partner to compete with global automakers such as Toyota Motor Corp. Partnership talks to form a partnership with Volkswagen, Europe’s largest carmaker, ended last year.

While Khazanah approached local companies Naza Group and Sime Darby Bhd. about buying the Proton stake, Syed Mokhtar’s DRB may be the best fit, said Mahathir.

“DRB seems well-run,” Mahathir said. “It is already producing cars for Suzuki, Mercedes and Volkswagen. They have the capacity to turn around Proton and won’t undermine its vendors.”

–With assistance from Elffie Chew and Manirajan Ramasamy in Kuala Lumpur. Editors: Young-Sam Cho, Suresh Seshadri, Barry Porter.

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DRB Hicom is a car assembler with diversified products and brands. They assemble passenger car brands such as Mercedes Benz, VW, Suzuki and some product range of Mitsubishi. Where else, they also assemble for Isuzu and Mercedes Benz for their commercial line. The Mercedes Benz car assembly in Pekan is highly regarded by Daimler Benz for their assembly plant outside Germany.

Needless to add, DRB Hicom also assemble military vehicles in their DEFTECH plant, also in Pekan.

The Proton saga continues

Written by Joanne Nayagam

Wednesday, 14 December 2011 10:49

The Proton-DRB-Khazanah saga continued yesterday with Proton Holdings Bhd issuing a statement saying that Khazanah Nasional Bhd, “in its normal course of business, it regularly receives proposals, enquiries and expressions of interests in relation to its various investments and companies where it has interest in, including Proton. Khazanah will make necessary disclosure at the appropriate time”. Khazanah neither denied nor confirmed the rumour of the sale of its 42.7% equity stake in Proton to DRB-Hicom Bhd. This was the second statement from Proton in a week, although it sent a clearer signal that something may be brewing at the national carmaker. On Dec 6, in a response to an article in The Edge, Proton had flatly denied any corporate development. It announced to Bursa Malaysia that “after making due enquiry with the board of directors and major shareholders, the company is not aware of any reason for the unusual market activity in its shares and that there is no material corporate development not previously disclosed”. Meanwhile, DRB-Hicom did not acknowledge that it is keen on buying into the national carmaker. The conglomerate had last week denied the speculation of it acquiring an equity stake in Proton. Proton needs a strategic partner to ensure it thrives in an increasingly competitive environment. Proton’s announcement came after the comments made by former prime minister Tun Dr Mahathir Mohamad that DRB-Hicom “is likely to win the bid for Khazanah’s equity interest in Proton” on Monday. Interestingly, the announcements on Proton’s seemingly imminent sale — and even the likely buyer — are coming from Dr Mahathir, who is an adviser to Proton, rather than its major shareholder — Khazanah, which has been rather quiet throughout the episode. The Edge weekly reported over a week ago that Khazanah might sell its stake in Proton to DRB-Hicom, which also assembles cars for Suzuki, Mercedes-Benz and global car maker Volkswagen AG (VW). It is a well-known secret that Khazanah has been looking for a suitor for its majority stake in Proton, in which the the former does not have a board representative despite being the major shareholder. In 2006, VW was interested in purchasing Khazanah’s stake in Proton, but the plan hit a snag due to what some said was nationalistic interest. Three years later in 2009, DRB-Hicom approached Proton and submitted a bid to buy 32% of Proton shares. Again, the talks failed for reasons unknown. Today, Proton is not exactly in the pink of health. Proton’s net profit fell 76% to RM15.6 million for 2QFY12 ended Sept 30 from RM65.9 million a year earlier due to higher expenses incurred by Lotus Group. Likewise, its 1HFY12 earnings took a sharp 86.6% fall to RM20.1 million from RM150 million a year earlier. As at Sept 30, Proton had RM1.31 billion in cash, bank balances and deposits. Its short-term and long-term borrowings grew 158% to RM959.1 million compared with RM371.2 million six months earlier. Proton is in the second year of a five-year turnaround plan for Lotus Group that costs £480 million (RM2.35 billion). However, if Khazanah didn’t sell its stake in 2006, one might wonder why the rush now, indeed? And why narrow the potential buyers to only a few local parties? Would it not be better to have a tender exercise open to global auto players as well? Limiting the pool of buyers will not get Khazanah the best price, or a partner for Proton that will ensure it thrives. Proton could definitely use a helping hand given its current weakening financial position, but certainly there should be no rush to make a transaction of such size and importance. Recently, DRB-Hicom in an announcement to Bursa refuted claims that it is looking to secure a substantial stake in Proton and would later divest part of the stake to VW. This wasn’t exactly a denial of the possibility that it could buy Khazanah’s stake and simply not sell it. If VW had expressed interest in Proton five years ago, surely it has some ideas on how to turn the company around. Was it even approached now? If Khazanah is indeed interested in potential buyers for its stake, the national sovereign wealth fund should open up the bids in a more transparent manner for a longer period of time. This is especially since Proton is currently trading below its book value per share of RM9.81, net tangible assets per share of RM7.62 as well as Khazanah’s estimated cost of above RM8 per share. Proton can rely on bigger automotive players to not only invest money in the national carmaker, but also to lend research and development (R&D) capabilities, something which DRB-Hicom can not offer. When contacted by The Edge Financial Daily, Aberdeeen Asset Management fund manager Abdul Jalil Rasheed said: “A lot of the car manufacturing brands are owned by one company, where divisions like R&D are shared by all the different divisions within the company”. If a significantly large auto player like VW were to have a stake in Proton, the local carmaker could stand to gain substantially from its R&D capabilities. Back in its heyday from the mid-1980s to the mid-1990s, almost every Malaysian had a Proton car. Fast forward to 2011 and Proton is seeing a decline in its market share, despite strong protectionist policies that result in hefty taxes and Malaysia having some of the highest car prices in the world. Thanks to economies of scale and continuous investments in R&D, there are plenty of foreign carmakers that are selling much nicer cars, priced not much higher than Proton here and far cheaper overseas. This is Proton’s biggest challenge. Jalil said the more pertinent question at this time is not if Khazanah were to sell its Proton stake to DRB-Hicom, but if Proton can just survive by being Proton. With all three parties neither denying nor agreeing to the claims of the sale of Proton, it really is anyone’s guess how the saga will further develop. Proton’s existing management is also said to have expressed interest in a management buyout, with the proposal spearheaded by its chairman Datuk Seri Mohd Nadzmi Mohd Salleh, and its CEO Datuk Seri Syed Zainal Abidin Syed Mohamad Tahir. However, on a brighter note for Proton, the group has seen some interest in its shares of late. Yesterday, Proton closed at RM4.27, four sen higher than Monday’s close.

Let us talk figures now. The rumour about the take over of Proton shot the share price up. The past four weeks saw a 65% increase in the hovering share price of Proton at RM 2.60-70.

Proton share price

Probably, DRB Hicom’s proposal is the best on the table. Rumours making its way around market talk that DRB Hicom is prepared to make “An offer above RM 6.00 per share” to Khazanah. It means that if any of the talk about DRM Hicom taking all 42.7% Khazanah’s stake, it would have cost RM 2.8 billion. That is excluding the mandatory general offer (MGO) that would be opened for all remaining shareholders.

Coupled with the RM 2 billion cash injection that Tun Dr Mahathir was talking about, who ever is taking up the whole 42.7% would need to get ready at least RM 5 billion in cash.

Rumours lurking also that Sime Darby and Naza were invited to pitch in. Realistically, not many players automotive players can afford to spare or raise that much cash. However, there are other consideration that has to be taken in before the decision on the beauty contest is final.

The assets of Proton, which include plants and land banks are worth more than the RM 3 billion acquisition cost. Especially if these assets were to be sliced and put through the ‘widespread asset unbundling’ (WAU) programs just like how Binafikir got Malaysia Airlines to do sometime seven years ago. Therefore, which ever party entrusted with the custodian of Proton from there onwards should be parties which would carry out with the program and follow through, all the way.

It is not about a carmaker as a group of companies. It is about the automotive industry as a whole. The continuous production of Proton ensured that over 300 Malaysian vendors develop the entire supply chain and component manufacturing. The whole program is about capacity building.

Proton being part of DRB Hicom would eventually be a boon for the defense industry. That is the strategic intent which would reduce the reliance of imported military vehicles.

Needless to mention that Tan Sri Syed Mokhtar Al Bukhary is a towering Malay entrepreneur, who has manage to grow his business and deliver some of the task lead upon him which is strategic in nature. Port of Tanjung Pelepas is one of gleaming example of the Al Bukhary Group success story.

To avoid the MGO, DRB Hicom could just take 32% holding where else Khazanah hold the remaining 15.74%. That would place Khazanah is the same grouping of other Federal Government’s agencies’ holdings in Proton, EPF’s and Petronas’s 10.78% and 7.85% respectively. It means the combined indirect shareholding of Proton by the Federal Government is still bigger than DRB Hicom. DRB Hicom can take the lead and be the driver for Proton and the automotive industry at large where else Federal Government still have a combined indirect stake of 34.37%. Policies on the automotive industry and the peripherals could be maneuvred via the DRB Hicom-Proton Group.

One of the options that Khazanah should consider instead of the outright sale to DRB Hicom, go for the ‘share swap’ model first seen of the Malaysia-AirAsia ‘synergy’ inked early August. Khazanah should allow DRB Hicom take the lead and they remain as strategic partner and shareholder, both in Proton and DRB Hicom. With all the brands accumulated under one group, Khazanah would eventually get its investment worth especially when some of these brands take prominence here around the region.

Federal Government should pay attention to either of these deals. The strategic intent for the nation is more valuable than Khazanah relinquishing their investment. Proton as an industrial pride of the nation and the consideration should also be centered around which party can take the automotive manufacturer to a higher position.

Federal Government could also fully utilise DRB Hicom-Proton to be the umbrella and catalyst of SME/Is, especially the 1,100 Bumiputra firms with huge potential to be driven into major industry players within the next five years. It is TERAJU grand plan for the Bumiputra Commerce and Industrial Community (BCIC), realising the ‘meritocracy’ within the ambit of New Economic Policy, as envisaged by Prime Minister Dato’ Seri Mohd. Najib Tun Razak.

Tun Dr Mahathir Mohamad’s original nucleus group of companies to embark into high technology via Hicom Group of companies back in 1984 where Proton was born in August 1985 and eventually the full peripherals for the automotive industry via DRB Hicom followed suit. That made the national car project formidable with the whole nine yards, upstream and downstream. So, the opportunity for DRB Hicom collaborating either by taking over fully, partially or even ‘share-swap’ with Proton would simply be just like, ‘sireh pulang ke gnggang‘.

There is definitely a synergy in automobile industry from DRB Hicom taking the lead and Proton being part of the bigger group of automotive conglomerate to progress and bringing the Malaysian car industry upwards.

- bigdogdotcom