1Q18 core losses at RM169.7m, appears to be below expectations compared to our full-year net loss forecasts of RM186m and consensus loss of RM153m. However, we expect losses to be narrowed in subsequent quarters upon completion of the divestment of loss-making Lotus and Proton stakes to Geely and in anticipation of better car sales on the back of improving consumer sentiment. We keep our FY18E and FY19E earnings forecasts unchanged. However, Our SoPderived target price is trimmed slightly lower from RM1.85 to RM1.70 (25% discount to holding company) due to concerns over execution risk in the new partnership to reviving Proton over the longer term. Reiterate Market Perform rating.

Key Result Highlights QoQ, 1Q18 registered a pre-tax loss of RM72.7m compared with a loss of RM255.6m in 4Q17 due to better performances in the auto sector. The better performances were due to lower losses at Proton arising from higher volume sales (+3.3%) and narrowing losses at automotive. This brings 1Q18 headline LATAMI to RM169m, which narrowed compared to core net loss of RM295m in 4Q17 (excluding intangible assets written off (RM71.3m) and net foreign exchange differences (RM37.8m) in 4Q17) mainly due to narrowing losses at automotive despite lower performances from services (-25%). The improvement is largely due to lower losses at Proton. No dividend was declared in this quarter as expected.

YoY, 1Q18 registered a lower loss before tax of RM72.7m compared with RM121.3m in 1Q17 mainly attributed to reduced losses by PROTON, higher profit contribution from the Services sector with the inclusion of Pos Malaysia Berhad profits and better results from other subsidiary companies. However, the share of results of joint ventures and associated companies were lower. 1Q18 reported LATAMI of RM169.7m was flat compared to RM169.3m.

Outlook. A new manufacturing plant in Tanjung Malim will be ready in five years’ time, but the first Proton car made with Geely’s technology will roll out by the end of next year or in 2019. Geely will facilitate Proton in terms of technology and at the same time assemble its fourwheel drive model, intelligent artificial car and develop their right-hand drive technology in Malaysia known as the Boyue. While Geely is more popularly known for its successful acquisition of Volvo, the ability of Geely to assist Proton from technical and marketing perspective as well as to penetrate new markets remains a concern given that Geely is also a relatively weak brand from a global perspective with a global market share of <5%. Proton still has to deal with the challenges posed by increasing competition and a weak brand perception. The outlook for DRB remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition.

Maintain Market Perform. We keep our FY18E and FY19E earnings forecasts unchanged. However, our SoP-derived target price is trimmed slightly lower from RM1.85 to RM1.69 (25% discount to holding company) due to concerns over execution risk in the new partnership to reviving Proton over the longer term. Reiterate Market Perform rating. Key risk to our call is faster-than-expected roll-out of new models under the new Geely-Proton management.

Source: Kenanga Research - 28 Aug 2017