• Limited downside risks in anticipation of the improving results in FY17-19, undemanding valuations and the announcement of a foreign strategic partner (FSP). According to the STAR on 7 Jan, Proton had finalised three FSPs (rumoured to be Groupe PSA, Renault SA and China's Geely Automobile Holdings) and is expected to wrap up its quest to announce the successful candidate as early as Feb. We are positive on the news as the FSP is a long term solution to improve its branding, technology and cost structures, thereby increasing its plant utilisation rate and cost efficiency of DRB.

• Currently, DRB is trading at undemanding valuation at 0.37x P/B, which is 35% lower than its 10-year historical average (0.57x). Overall, DRB’s core PATAMI is expected to leapfrog to RM298m in FY19 from a loss of RM451m in FY16, premised on: (1) the potential entry of a strategic foreign partner; (2) steady earnings from the RM7.55bn AV8 contract; (3) the ongoing plans to dispose of non-core assets to relieve the balance sheet.

• Uptrend remains intact unless falling below RM1.07-1.12 supports. After hitting a monthly high of RM1.27 on 22 Dec, we believe DRB’s share prices appear to be at the tail end of its short term consolidation as slow stochastic indicator is bottoming up. Overall, short to mid tern uptrend remains intact as share prices are still trending above 200-d SMA (near RM1.12) and the LT downtrend line resistance (near RM1.07). A decisive close above immediate resistance at RM1.23 (50% FR) will spur prices higher to RM1.30 (61.8% FR) and our LT objective at RM1.40 (76.4% FR).

• On the flip side, a decisive breakdown below RM1.12 will drive prices lower towards RM1.07 (23.6% FR and the LT downtrend line). Cut loss at RM1.05.

Source: Hong Leong Investment Bank Research - 9 Jan 2017