1Q17 marks the third consecutive quarterly losses at RM169.3m compared to our full-year net profit forecasts of RM76m and consensus loss of RM54.8m, respectively. The negative variance from our forecast was mainly due to higher-than-expected losses from the automotive segment. No dividend was declared as expected. Due to better trading sentiment over the short-term on news of a potential tie-up with a foreign partner, we reduce our discount to its SoP valuation from 35% to 15%. Maintain UNDERPERFORM. Our SoP-derived target price is raised from RM0.76 to RM1.02.

Key Result Highlights

QoQ, 1Q17 revenue fell 5% due largely to lower contribution from automotive (-6% QoQ), attributable largely to PROTON (-14% QoQ) and lower percentage of completion of AV8 project. Pre-tax loss at the automotive division narrowed to RM209m compared to RM729m in 4Q16. The losses were attributed largely to the poor performance of PROTON group with lower sales of motor vehicles amidst stiff competition, volatility in foreign exchange rates and weak consumer sentiment. This brings 1Q LATAMI to RM169m.

YoY, 1Q17 revenue fell 15% no thanks to lower contribution across the board, including automotive (-20.9%) as the Proton marque continued to disappoint with negative sales growth of 27%. Due to the losses at its automotive division which PROTON accounts for 70-80%, 1Q17 loss after tax widened to RM169m compared to core losses of RM19.7m in 1QM16.

Outlook. The outlook for DRB remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition as well as weak consumer demand. However, the group is looking at: (i) a turnaround plan for PROTON, which involves a RM1.5b soft loan from the Government, which is geared towards helping PROTON in its turnaround efforts as well as to expand into domestic and international markets, and (ii) to identify a strategic partner by 1QCY17.

Although the stock price might be lifted temporarily on news of a potential tie-up with a foreign partner, Proton still has to deal with the challenges posed by increasing competition, weak brand perception and a stronger Yen.

The shareholders of the Group recently gave approval to consolidate its logistics businesses via the integration of services of KL Airport Services Sdn Bhd (KLAS) into Pos Malaysia Berhad. This exercise is expected to be completed by end of Sept 2016 and subsequently, Pos Malaysia will become a 53.5% subsidiary of the Group.

Change to Forecasts. We cut our FY17E earnings by 65%, due to the poor set of results by taking into account lower volume sales at PROTON and higher operating expenses.

Rating & Valuation. Due to the better trading sentiment over the shortterm, we reduce our discount to its SoP valuation from 35% to 10%. Maintain UNDERPERFORM. Our SoP-derived target price is raised from RM0.76 to RM1.02.

Source: Kenanga Research - 1 Sep 2016