News    Over the weekend, DRB-Hicom’s wholly-owned Proton Holdings Bhd, the national car maker, unveiled its  most affordable car, the Proton Saga Super Value (SV). The car is part of the Saga FLX model range but will be branded as the Saga SV. 

Powered by the same 1.3 litre Campro IAFM as Saga FLX and available in manual and CVT automatic transmissions, the Saga SV is priced from RM33,438 to RM36,888 in Peninsular Malaysia. The current Proton Saga cars are priced between RM38,800 and RM49,900. 

The entry level Saga SV is almost 13% or RM5,000 cheaper than the FLX Standard 1.3, the previous entry-level Saga.

On the average, the new price is 10% lower compared to the current similar Saga FLX models. 

The Saga model accounts for 40% of Proton’s vehicle sales. 

Comments     We are neutral on this latest news by Proton to introduce the new variant (similar to Saga FLX) which is 13% cheaper than the FLX Standard 1.3, the previous entry-level Saga. This latest move by Proton is expected to arrest the MOM decline in the sales of Proton cars and is thus positive. However, the lower car price will put further pressure on its already thin and declining profit margins. EBIT margins in DRB-Hicom’s automotive segment were just 1.9% in FY13 compared  to 3.5% in FY12. 

Ceteris paribus, based-on-our back of envelope calculation, an average 10% reduction in Proton Saga’s price will only reduce DRB-Hicom EBIT by <2%. 

Looking ahead, this move by Proton could lead the entire industry into the next phase of price competitions, rebates and promotions. 

Separately, Proton’s collaboration with Japanese automotive giant, Honda Motor Co. has finalised. However, the details of the collaboration have yet to be ironed out with the first variant of the agreement being expected only sometime later this year. Speculation is rife that Proton is expected to use the Honda Accord chassis in order to bring back the ‘Perdana’ replacement model.

In the recently concluded DRB-HiCOM Investor Day event, management has highlighted that the key initiatives to revive Proton and reduce its cost would be to further reduce its vendors or suppliers with a target to reducing the  cost by 30% in the next five years. So far, we understand that Proton has reduced its vendors from 236 to 209 in order to reduce the many layers of vendors in the procurement chain. The company will also leverage on its collaboration with its partners to reduce cost via the sharing of platform, technology and putting in place stringent procurement processes. 

Outlook     Earnings contributions from its RM7.55b AV8X8 contract will start coming in from FY14 onwards. The company also has solid and stable concession businesses in POS Malaysia, Puspakom, KLAS and Alam Flora while its property division is expected to contribute positively in the future as well as the group plans to launch property development projects with a total gross development value of RM13.3b in 2013-15.

Rating    Maintaining our MARKET PERFORM rating and our RM2.81 SOP-based target price.

Risks    Economic uncertainty and a weak consumer sentiment.

Source: Kenanga