MARC Affirms its Ratings of A+IS and A-IS on DRB-HICOM Berhad's (DRB-HICOM) Islamic Medium-Term Notes (IMTN) Programme

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1. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications MARC​ ​Affirms​ ​its​ ​Ratings​ ​of​ ​A+IS​ ​and​ ​A-IS​ ​on DRB-HICOM​ ​Berhad's​ ​(DRB-HICOM)​ ​Islamic Medium-Term​ ​Notes​ ​(IMTN)​ ​Programme 07​ ​December​ ​2017 MARC​ ​has​ ​affirmed​ ​its​ ​ratings​ ​of​ ​A+IS​ ​and​ ​A-IS​ ​on​ ​DRB-HICOM​ ​Berhad's​ ​(DRB-HICOM) Islamic​ ​Medium-Term​ ​Notes​ ​(IMTN)​ ​Programme​ ​of​ ​up​ ​to​ ​RM1.8​ ​billion​ ​and​ ​Perpetual​ ​Sukuk Musharakah​ ​Programme​ ​(Perpetual​ ​Sukuk)​ ​of​ ​up​ ​to​ ​RM2.0​ ​billion​ ​respectively.​ ​The​ ​outlook​ ​on the​ ​ratings​ ​is​ ​maintained​ ​at​ ​stable. The​ ​affirmed​ ​ratings​ ​reflect​ ​the​ ​improving​ ​credit​ ​profile​ ​of​ ​DRB-HICOM​ ​following​ ​a​ ​49.9% dilution​ ​in​ ​its​ ​stake​ ​in​ ​Proton​ ​Holdings​ ​Berhad​ ​(Proton)​ ​and​ ​the​ ​full​ ​divestment​ ​of​ ​Lotus​ ​Advance Technologies​ ​Sdn​ ​Bhd​ ​(Lotus),​ ​which​ ​have​ ​led​ ​to​ ​a​ ​positive​ ​impact​ ​on​ ​the​ ​group's​ ​liquidity​ ​and leverage​ ​position.​ ​The​ ​ratings​ ​also​ ​factor​ ​in​ ​the​ ​stronger​ ​performance​ ​of​ ​its​ ​non-Proton​ ​marques such​ ​as​ ​Honda,​ ​the​ ​improving​ ​prospects​ ​of​ ​its​ ​logistics​ ​business​ ​as​ ​well​ ​as​ ​stable​ ​revenue generation​ ​from​ ​sizeable​ ​contracts​ ​in​ ​its​ ​defence​ ​and​ ​aerospace​ ​businesses.​ ​Moderating​ ​the ratings​ ​are​ ​potential​ ​challenges​ ​in​ ​turning​ ​around​ ​Proton,​ ​given​ ​the​ ​intense​ ​competition​ ​in​ ​the domestic​ ​automotive​ ​industry​ ​and​ ​potential​ ​increase​ ​in​ ​capital​ ​expenditure​ ​to​ ​fund​ ​the expansion​ ​of​ ​DRB-HICOM's​ ​logistics​ ​business. The​ ​dilution​ ​of​ ​Proton​ ​to​ ​Zhejiang​ ​Geely​ ​Holding​ ​Group​ ​Co​ ​Ltd​ ​(Geely),​ ​a​ ​China-based automotive​ ​player,​ ​is​ ​a​ ​fulfilment​ ​of​ ​a​ ​key​ ​condition​ ​imposed​ ​by​ ​the​ ​Malaysian​ ​government​ ​on Proton​ ​to​ ​collaborate​ ​with​ ​a​ ​foreign​ ​strategic​ ​partner​ ​(FSP)​ ​pursuant​ ​to​ ​the​ ​subscription​ ​of Proton's​ ​RM1.5​ ​billion​ ​Redeemable​ ​Convertible​ ​Cumulative​ ​Preference​ ​Shares​ ​(RCCPS)​ ​in 2016.​ ​The​ ​government​ ​has​ ​since​ ​released​ ​a​ ​RM1.1​ ​billion​ ​grant​ ​to​ ​Proton​ ​as​ ​a​ ​reimbursement for​ ​R&D​ ​expenses​ ​following​ ​the​ ​completion​ ​of​ ​the​ ​FSP​ ​exercise.​ ​With​ ​the​ ​government​ ​grant, and​ ​proceeds​ ​from​ ​the​ ​dilution​ ​of​ ​Proton​ ​and​ ​full​ ​divestment​ ​of​ ​Lotus,​ ​DRB-HICOM​ ​and​ ​Proton collectively​ ​received​ ​about​ ​RM1.7​ ​billion.​ ​From​ ​the​ ​overall​ ​proceeds,​ ​DRB-HICOM​ ​will​ ​reduce group​ ​borrowings,​ ​which​ ​include​ ​Proton's​ ​outstanding​ ​RM533.3​ ​million​ ​term​ ​loan,​ ​to​ ​about RM6.0​ ​billion​ ​from​ ​RM6.8​ ​billion​ ​as​ ​at​ ​financial​ ​year​ ​ended​ ​March​ ​31,​ ​2017​ ​(FY2017).​ ​This would​ ​result​ ​in​ ​reducing​ ​the​ ​debt-to-equity​ ​(DE)​ ​to​ ​0.54​ ​times​ ​and​ ​net-DE​ ​to​ ​0.30​ ​times (FY2017:​ ​0.71​ ​times;​ ​0.42​ ​times). Proton​ ​is​ ​expected​ ​to​ ​benefit​ ​from​ ​its​ ​partnership​ ​with​ ​Geely​ ​given​ ​the​ ​latter's​ ​manufacturing expertise,​ ​characterised​ ​by​ ​a​ ​low​ ​cost​ ​structure​ ​with​ ​innovative​ ​technology.​ ​Geely,​ ​which​ ​had 4%​ ​of​ ​China's​ ​passenger​ ​vehicle​ ​market​ ​in​ ​2016,​ ​produces​ ​12​ ​models​ ​under​ ​its​ ​brand​ ​name;​ ​it also​ ​produces​ ​Volvo​ ​cars​ ​through​ ​wholly​ ​owned​ ​Volvo​ ​Car​ ​Corporation​ ​which​ ​it​ ​acquired​ ​in 2010,​ ​and​ ​turned​ ​around​ ​the​ ​then​ ​loss-making​ ​Swedish​ ​car​ ​manufacturer.​ ​Over​ ​the​ ​near​ ​term,
2. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications Geely​ ​will​ ​inject​ ​its​ ​Boyue​ ​SUV​ ​model​ ​into​ ​Proton's​ ​model​ ​line-up​ ​and​ ​boost​ ​Proton's manufacturing​ ​output​ ​by​ ​utilising​ ​its​ ​Tanjung​ ​Malim​ ​plant​ ​to​ ​assemble​ ​right-hand​ ​drive​ ​Geely and​ ​Volvo​ ​cars​ ​for​ ​the​ ​ASEAN​ ​market.​ ​DRB-HICOM​ ​has​ ​earmarked​ ​about​ ​RM180.0​ ​million​ ​to fund​ ​Proton's​ ​relocation​ ​to​ ​Tanjung​ ​Malim. MARC​ ​observes​ ​that​ ​DRB-HICOM's​ ​market​ ​position​ ​in​ ​the​ ​domestic​ ​automotive​ ​industry​ ​has remained​ ​strong,​ ​accounting​ ​for​ ​35.4%​ ​of​ ​total​ ​industry​ ​volume​ ​of​ ​284,875​ ​units​ ​for​ ​1HFY2018 (FY2017:​ ​33.5%).​ ​Its​ ​market​ ​position​ ​remains​ ​supported​ ​by​ ​associate​ ​company​ ​Honda​ ​Malaysia Sdn​ ​Bhd,​ ​whose​ ​sales​ ​grew​ ​15.7%​ ​y-o-y​ ​to​ ​51,459​ ​units.​ ​In​ ​addition​ ​to​ ​vehicle​ ​assembly​ ​and sales,​ ​the​ ​automotive​ ​division's​ ​performance​ ​continued​ ​to​ ​be​ ​supplemented​ ​by​ ​its​ ​outstanding RM2.9​ ​billion​ ​armoured​ ​military​ ​vehicles​ ​project​ ​as​ ​well​ ​as​ ​its​ ​RM11.0​ ​billion​ ​aerospace component​ ​manufacturing​ ​order​ ​book.​ ​The​ ​long-term​ ​contracts​ ​provide​ ​earnings​ ​visibility​ ​for​ ​the group. DRB-HICOM's​ ​concession-driven​ ​business​ ​through​ ​PUSPAKOM​ ​Sdn​ ​Bhd​ ​(vehicle​ ​inspection) and​ ​Alam​ ​Flora​ ​Sdn​ ​Bhd​ ​(solid​ ​waste​ ​management)​ ​continue​ ​to​ ​provide​ ​modest​ ​earnings. However,​ ​its​ ​non-concession​ ​business​ ​has​ ​strengthened​ ​with​ ​DRB-HICOM​ ​increasing​ ​its​ ​stake in​ ​Pos​ ​Malaysia​ ​Berhad​ ​(Pos​ ​Malaysia)​ ​from​ ​32.2%​ ​to​ ​53.5%​ ​in​ ​FY2017.​ ​The​ ​consolidation​ ​of Pos​ ​Malaysia,​ ​which​ ​holds​ ​52%​ ​share​ ​of​ ​the​ ​domestic​ ​courier​ ​services​ ​market,​ ​has​ ​supported the​ ​group's​ ​financial​ ​performance.​ ​Pos​ ​Malaysia,​ ​which​ ​expects​ ​to​ ​invest​ ​about​ ​RM760.0​ ​million to​ ​improve​ ​its​ ​courier​ ​services​ ​infrastructure,​ ​is​ ​lowly​ ​geared​ ​(DE:​ ​0.12​ ​times)​ ​with​ ​existing borrowings​ ​comprising​ ​only​ ​trade-related​ ​debts. For​ ​1HFY2018,​ ​the​ ​group​ ​registered​ ​pre-tax​ ​profit​ ​of​ ​RM817.7​ ​million​ ​(1HFY2017:​ ​negative RM388.9​ ​million),​ ​mainly​ ​supported​ ​by​ ​the​ ​one-off​ ​government​ ​grant​ ​of​ ​RM1.1​ ​billion​ ​and​ ​the consolidation​ ​of​ ​Pos​ ​Malaysia's​ ​earnings.​ ​With​ ​the​ ​bulk​ ​of​ ​the​ ​group's​ ​diversified​ ​operations remaining​ ​stable,​ ​further​ ​improvement​ ​in​ ​DRB-HICOM's​ ​group​ ​performance​ ​will​ ​hinge​ ​on​ ​a turnaround​ ​in​ ​Proton​ ​over​ ​the​ ​intermediate​ ​term.​ ​The​ ​group​ ​has​ ​a​ ​strong​ ​liquidity​ ​position​ ​with an​ ​unencumbered​ ​cash​ ​balance​ ​of​ ​about​ ​RM3.0​ ​billion​ ​as​ ​at​ ​end-1HFY2018,​ ​in​ ​addition​ ​to about​ ​RM2.7​ ​billion​ ​in​ ​unutilised​ ​credit​ ​lines. At​ ​the​ ​holding​ ​company​ ​level,​ ​DRB-HICOM's​ ​revenue,​ ​comprising​ ​largely​ ​dividend​ ​income, increased​ ​to​ ​RM897.3​ ​million​ ​in​ ​FY2017​ ​(FY2016:​ ​RM335.8​ ​million),​ ​largely​ ​from​ ​a​ ​one-off dividend​ ​payment​ ​following​ ​a​ ​non-core​ ​asset​ ​disposal.​ ​Its​ ​associate​ ​Honda​ ​is​ ​expected​ ​to remain​ ​the​ ​main​ ​contributor,​ ​having​ ​accounted​ ​for​ ​38.5%​ ​of​ ​total​ ​dividend​ ​income​ ​in​ ​FY2017 (FY2016:​ ​38.7%).​ ​For​ ​FY2018,​ ​the​ ​holding​ ​company's​ ​projected​ ​RM202.2​ ​million​ ​in​ ​dividend income,​ ​in​ ​addition​ ​to​ ​proceeds​ ​from​ ​planned​ ​land​ ​disposal​ ​of​ ​RM543.0​ ​million,​ ​is​ ​expected​ ​to support​ ​its​ ​near-term​ ​obligations.​ ​The​ ​balance​ ​of​ ​the​ ​RM1.2​ ​billion​ ​RCCPS​ ​held​ ​by​ ​the government​ ​is​ ​secured​ ​against​ ​Proton's​ ​land​ ​assets​ ​of​ ​the​ ​same​ ​value​ ​that​ ​have​ ​been transferred​ ​to​ ​DRB-HICOM.​ ​The​ ​current​ ​outstanding​ ​under​ ​the​ ​IMTN​ ​and​ ​Perpetual​ ​Sukuk​ ​are RM1.52​ ​billion​ ​and​ ​RM1.04​ ​billion​ ​respectively.
3. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications The​ ​stable​ ​outlook​ ​reflects​ ​MARC's​ ​expectation​ ​that​ ​DRB-HICOM's​ ​credit​ ​metrics​ ​would​ ​remain commensurate​ ​with​ ​its​ ​current​ ​rating​ ​band.​ ​A​ ​positive​ ​rating​ ​action​ ​would​ ​be​ ​considered​ ​if DRB-HICOM​ ​demonstrates​ ​a​ ​sustainable​ ​improvement​ ​in​ ​its​ ​consolidated​ ​financial performance,​ ​in​ ​particular​ ​its​ ​cash​ ​flow​ ​metrics. Organisation​ ​Name: News​ ​Type: Malaysian​ ​Rating​ ​Corporation​ ​Berhad​ ​(MARC) RATING​ ​ANNOUNCEMENT Source: BNM​ ​Announcements Media​ ​Contact Saifuruddin​ ​Othman​ ​+603-2717​ ​2945​ ​/​ ​saifuruddin@marc.com.my, Taufiq​ ​Kamal,​ ​+603-2717​ ​2951​ ​/​ ​taufiq@marc.com.my. Disclaimer: This​ ​communication​ ​is​ ​provided​ ​by​ ​Malaysian​ ​Rating​ ​Corporation Berhad​ ​(MARC)​ ​on​ ​the​ ​basis​ ​of​ ​information​ ​believed​ ​by​ ​MARC​ ​to​ ​be accurate​ ​and​ ​reliable​ ​as​ ​derived​ ​from​ ​publicly​ ​available​ ​sources​ ​or provided​ ​by​ ​the​ ​rated​ ​entity​ ​or​ ​its​ ​agents.​ ​MARC,​ ​however,​ ​has​ ​not independently​ ​verified​ ​such​ ​information​ ​and​ ​makes​ ​no​ ​representation as​ ​to​ ​the​ ​accuracy​ ​or​ ​completeness​ ​of​ ​such​ ​information.​ ​Any assignment​ ​of​ ​a​ ​credit​ ​rating​ ​by​ ​MARC​ ​is​ ​solely​ ​to​ ​be​ ​construed​ ​as​ ​a statement​ ​of​ ​its​ ​opinion​ ​and​ ​not​ ​a​ ​statement​ ​of​ ​fact.​ ​A​ ​credit​ ​rating​ ​is not​ ​a​ ​recommendation​ ​to​ ​buy,​ ​sell,​ ​or​ ​hold​ ​any​ ​security.