Post meeting with management, we remain positive on DRB’s outlook. Proton has registered a successful turnaround to RM169.4m in FY12/19 (since FY11) post restructuring exercises and new models introductions, and on track with its long term 10-year business plan. Management expects the overall automotive segment to rebound in 2HFY20 following introduction of SST exemptions and launching of several attractive models. However, Deftech, CTRM and Bank Muamalat are expected to remain subdued in the near term, affected by Covid-19. Property/Asset restructuring exercise is expected to complete by Sep 2020 while its concession assets remains stable. We reiterate our BUY recommendation with lower TP: RM2.52 (from RM2.75) based on 25% discount to SOP: RM3.35, following earnings adjustments.

Proton turnaround. Based on 9 months reporting of FY12/19 annual report, Proton reported a strong successful turnaround to profit of RM169.4m (from loss RM481.2m in 12 months FY03/12). We believe the core profits to be of similar amount as there were no significant EIs in DRB’s account. The improvements was mainly due to:

1) higher Proton sales volume;

2) improved sales mix from higher margin X70;

3) on-going cost cutting measures;

4) improvement in operation efficiencies; and

5) reduction in defects.

Despite the impact of Covid-19 in 1HFY20, Proton is targeting 100k unit sales for FY20 (37.1k units in 1HFY20) and maintain profitability for the year. We do not discount the possibility of Proton exceeding its sales target, given ongoing strong demand for existing models under SST exemption for new passenger car (15 Jun – 31 Dec 2020) and the upcoming highly anticipated X50 model in 4QFY20. Another new sedan model is also expected in 3QFY21. Proton has budgeted RM3bn for capex within 3 years for the production of Next-Gen models, which would be funded internally by Proton’s sales proceeds as well as available bank credit lines. Proton’s projected cash-flow proceeds is also strong enough to even finance the redemptions of RM1.5bn RCCPS (redeemable convertible cumulative preference shares) owned by government and DRB group. To recap on Proton’s initial 10 year business plan:

1) to return to a profitable position as soon as practical (achieved);

2) to regain leading position in Malaysia (reclaimed second behind Perodua); and

3) to become one of the top-three automotive brands in ASEAN (started export to Brunei).

Source: Hong Leong Investment Bank Research - 14 Jul 2020