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Monday, 8 July 2013

DRB-Hicom a Financial Holding Company?

The regulatory and supervisory framework of Malaysia has begun a new phase of its development as the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) come into force 1 July 2013.

Under the new FSB, financial groups and companies that owned more than a 50% stake in a financial institution would now be required to register as a financial holding company.

Among organisations that currently own more than a 50% stake in financial institutions are :
DRB-Hicom Bhd, Lembaga Tabung Haji, HLFG, Hong Leong Company (M) Bhd, AKKA Sdn Bhd, Employees Provident Fund and the Malaysian Industrial Development Finance Bhd (MIDF)

However, Maybank Investment Bank Bhd (MIB) stated in the report at the beginning of the year that while DRB-Hicom would be affected under this ruling, it is already in the process of paring its stake in Bank Muamalat down to 40% from 70% . But on March  2013 Affin Holdings Berhad announced that the company had ceased negotiations with  Bank Muamalat's shareholders, DRB-Hicom Bhd and Khazanah nasional Berhad.

Excluding DRB-Hicom, MIB in the opinion that capital levels at listed financial holding companies at this juncture appear to be sufficient to meet what is going to be “stricter” capital requirements by the central bank under the new framework.
“At this stage, capital levels at listed financial holding companies appear adequate, at about 8% on average, and we await actual specifics,” MIB said.

Analysts said they believed details of the new framework, including the various capital requirements, would be released within the next few months. “Financial holding companies have been coy about their present capital ratios at the group level, but guidance would suggest a CET1 (common equity Tier 1) ratio of about 8%, which is adequate against the prevailing minimum of 7% by 2019 under Basel III,” MIB noted.

It is interesting to see whether MIB would reach the same conclusion if DRB-Hicom included as a Financial Holding Company.

 Alliance Research banking analyst Cheah King Yoong in the opinion that DRB-Hicom could be a Financial Holding company under monitor by Bank Negara.

The question is whether DRB-Hicom can fulfill the capital requirement as a financial Holding company?

DRB-Hicom view as an assets play by analyst. It assets and project included:

Proton’s Shah Alam factory land worth RM1bil (100 hectares at RM100 per sq ft);

·Tebrau land located in Zone E of Iskandar Malaysia worth RM731mil (365 hectares at RM20psf);

·70% stake in Bank Muamalat valued at RM1.5bil (based on 1.4 price to book balue at a 30% discount to its larger rival BIMB), and

·32.2% stake in Pos Malaysia with current market value of RM856mil.

The four assets are collectively worth nearly 75% of DRB-Hicom’s market capitalisation.

DRB-Hicom mainly leveraging on its existing landbanks throughout Malaysia: 

Notable "future" projects include Glenmarie Heights in Iskandar Malaysia (gross development value (GDV) of RM5bil), Jalan Tun Razak project (GDV of RM900mil), various Glenmarie projects in Klang Valley (GDV of RM1.6bil) and Hicom-Pegoh Industrial Park (GDV: RM440mil).

Actually, Property division contirbute lowest in revenue and profit at the moment. the biggest contribution are on services (government Concession )

But being a financial holding company is different ball game. Liquidity is more important than assets. No analyst comment whether DRB-Hicom able to fulfill condition as a Financial Holding Company.

According to AmResearch published on 11 Jun 2013 : The group has stepped up its gearing pursuant to the acquisition of Proton Holdings Bhd and Pos Malaysia Bhd before that.

DRB-Hicom’s gross gearing ratio now stands at 0.9x. The group says it would still be in a comfortable position with a gross gearing ratio of 1x.

As at 31 March 2013, it was at a net debt position (-RM484mil), with a net debt:equity ratio of only 0.07x. vs. a net cash position (+RM1.85bil) a year earlier.

DRB-Hicom group foresees a capex totalling RM3.2bil over the next couple of years – comprising investments in the auto (80%), services (17%) and PAC (3%).
DRB-Hicom net interest expenses  alone for Year ended 2013 amounted to RM242.3million and it interest cover is 2.6. How much interest you paid for your credit card yearly, even including your interest on car and housing loan?
Would Bank Negara give special treatment to DRB-Hicom?

Update :  Sorry to informed that all the above figure from Amresearch report appear wrong. According to quarterly report of DRB-Hicom. Interest expenses for DRB-Hicom for Year Ended 2013 amounted to RM337.6million in stead of RM242.3 million above. Thus, it interest cover by Amresearch also appear wrong.
Update :DRB-Hicom Net profit dropped 68.5%  in Q1

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