Tuesday July 24, 2012
Analysts optimistic on Lotus outlook because of new plan
By CHOONG EN HAN
New turnaround plan likely to be much more realistic than previous one
“The original Lotus turnaround plan was always viewed by the market with a large dose of scepticism. It was ambitious perhaps overly so with little consideration given to the financial constraints at Proton.
“The revised plan is likely to be much more realistic,” said RHB Research analyst Alexander Chia.
The previous turnaround plan was mooted by former Lotus chief Dany Bahar but that was done before DRB-Hicom took over Proton Holdings Bhd, which owns Lotus.
Chia also said that new model pipeline was likely to be trimmed to three (from five), and the burn rate on expenses was likely to be cut back, with high-cost consultants to be reduced.
He said while the selling of Lotus would have been the easy way out for DRB-Hicom, the group had obviously seen value in Lotus and would need to take the long road to turn it around.
“DRB-Hicom should make greater use of the engineering expertise and skill sets at Lotus. That could help shorten the development time of new models, engines and drivetrains,” he said.
In a report dated July 4, RHB Research said that following a meeting with DRB-Hicom management, the company said it was still reformulating a long-term strategy to rehabilitate both Proton and Lotus.
The new strategy would not be finalised for another six to 12 months.
It was reported yesterday that some £200mil has been pumped into Lotus since January, and DRB-Hicom is prepared to put in another £100mil by 2013.
This is apart from the £270mil syndicated loan taken at the end of 2010 for which Proton has given its corporate guarantee.
It was revealed in Proton's quarterly results for December 2011 that the £270mil loan facility had been reclassified as current when Lotus technically breached its loan covenants after a delay in the execution of a management share subscription and joint-venture agreement on product development.
Lotus had drawn down some £207mil, and DRB-Hicom is currently working with Proton's six big lenders to allow the Norfolk-based sportscar maker to draw down the remaining loan amount.
“With plans to retain Lotus and the gestation period required to rehabilitate the Proton group, DRB-Hicom will need to service the borrowings taken to finance the Proton acquisition in the meantime.
“We estimate interest costs alone on Proton-related borrowings will exceed RM150mil per annum,” RHB Research said.
It said that production and development work was believed to have come to a near standstill following the loan freeze.
“However, in April, after additional funding from Proton, production resumed and is now running at 44 units per week, its production limit based on single shift operations.
“Management reports strong demand for current Lotus products from China,” it said.
Meanwhile, an analyst with Hong Leong Investment Bank said that the slower car introduction would enable Lotus to have sufficient cashflow to finance through its turnaround.
“While £200mil has been drawn down for restructuring and research and development purposes, this is justified as cost would be high in the early years of development.
“The five cars envisioned is expected to utilise the same platform which would result in more development cost savings in the future,” he said.
He said should the introduction of the cars be delayed, Lotus could time the markets and gauge market expectations.
“It makes no sense to launch a good car if the markets are soft, and launching the new cars in a subsequential way could allow Lotus to take in feedback and improve future features,” he said.