Meeting with DRB management has reaffirmed our positive view on DRB’s turnaround. Proton has recorded its second consecutive profits in 1QFY12/19. We are confident of Proton’s outlook on increasing sales volume, new efficient production line, attractive new model line-ups (upcoming X70 CKD and X50 CKD), ongoing cost cutting measurements and production consolidation into Tanjung Malim. Deftech contribution is expected to normalise in coming quarters after a seasonally weak 1QFY12/19. Management is engaging the government for a new program, which will provide earnings continuity post 2020. The upcoming stamp tariff hikes will improve PosM earnings and cashflow in the short-term, while PosM continues its restructuring plan. Furthermore, DRB has large undeveloped landbanks with combined market value of RM6.5bn (RM3.35/share). We reiterate our BUY recommendation with unchanged TP: RM3.50 based on 10% discount to SOP: RM4.13.

Proton turnaround. DRB management has confirmed that Proton remained profitable in 1QFY12/19 (despite the absence of RM80m write-back in provisions in 4QFY03/19) due to improved sales volume, contributions from X70 and improved cost structures. We estimated that Proton registered an encouraging profit at c. RM40-50m in the quarter. The new production line in Tanjung Malim plant is on track to commence in 3QFY12/19, assembling the new X70 CKD as well as catering for future new generation models. The highly anticipated new X50 CKD is expected to be launched in Aug 2020 and subsequently Proton is exploring for more export opportunities. Despite the expected increase in depreciation and finance costs, we expect Proton to stay profitable on the back of higher sales volume and improvement in cost structure in 2020. In addition, Proton will also be consolidating its Shah Alam operation (land to be transferred to DRB at marginal costs) to the enlarged Tanjung Malim plant by 2023, to further improve cost efficiency and achieve synergies.

Deftech. Management clarified the weak 1QFY12/19 margin for automotive segment was partially attributed to seasonally weaker earnings recognition for Deftech, which would normalise in coming quarters. Deftech’s remaining orderbooks for AV8 contract worth of RM1.5bn will last until 2020. At the meantime, Deftech is in talks with the government for a new development program.

PosM. Management is confident for a stamp tariff hike by end 2019 or early 2020. Judging by 50% hike or 30sen (similar to previous round back in 2010), management guided potential revenue growth of RM300m (but likely to be partially offset by accelerated drop in volume), which will address short term concerns on PosM’s earnings and cashflow. Admittedly, the logistics segment is facing increasing competitions. PosM is undergoing restructuring plan and engagement with government to further improve its cost structure while staying relevant in the industry.

Property. The proposed asset swap exercise is targeted to complete by 1QFY12/20, eventually transforming DRB as into a large industry land owner with over 3,000 acres mainly in Tebrau (Johor), Tanjung Malim (Perak), Pegoh (Melaka), Shah Alam (Selangor) and Bukit Kayu Hitam (Kedah) with combined current market value of RM6.5bn (RM3.35/share). Going forward, the property segmental will be driven by stable concession earnings from ICQS Bukit Kayu Hitam and Media City as well as lumpy earnings from the completion of Media City (up to 2020) and ongoing pockets of land developments.

Forecast. We maintain our earnings forecast for FY12/19-21.

Maintain BUY with unchanged TP: RM3.50 based on 10% discount to SOP: RM4.13. We remain positive on Proton’s outlook as it continues to enjoy strong sales growth with attractive model line-ups. Proton has remained profitable for second consecutive quarter into 1QFY12/19.

Source: Hong Leong Investment Bank Research - 22 Oct 2019