FY19 CNP came in at RM183m (+10% YoY) compared to our forecast of RM350.7m. However, this appears to be above consensus CNP of RM100m. The negative variance was due to lower-than-expected Automotive, services sector and associates’ contributions. We cut our FY20E CNP by 43% to RM209m and introduce FY21E CNP of RM251m. Downgrade to UP from MP with a lower SoP TP of RM1.80 (from RM1.90).

FY19 below our expectation. FY19 CNP came in at RM183m (+10% YoY) compared to our RM350.7m estimate. However, this appears to be above consensus CNP of RM100m. The negative variance was due to lower-than-expected Automotive, services sector and associates’ contributions. No dividend was declared for the quarter. However, we expect the group to declare a final dividend of 3.0 sen, after publishing its annual report (FY18: 3.0 sen).

YoY, FY19 CNP rose 10% mainly from improved contribution by its banking segment, aviation (CTRM), concession (Puspakom), property segment, and stronger vehicles sales by PROTON at 70,182 units (+9%) in 4Q, which more than offset lower overall contribution from Automotive, Pos Malaysia, and lower share of profits from associates’ (-26%), namely Honda, which recorded lower sales at 100,290 units (-6%), as consumers held back purchases in anticipation of newer models. Note that, Honda has only recently launched the face-lifted Honda HR-V, and Mugen variants of Honda Jazz and BR-V, Proton was buoyed by buoyed by the all-new Proton X70 (CBU), supported by face-lifted Proton Iriz and Persona, Property segments (Completion of Lease 1 of Media City Development, and Phase 1 of the Integrated Customs, Quarantine and Security Complex) and Pos Malaysia (FY19 plunged into core net loss of RM126.1m compared to a net profit of RM93.3m in FY18).

QoQ, 4Q19 recorded significant turnaround with CNP of RM188m (+157%), mainly from a turnaround in the Automotive segment’s profit contributions of RM259m compared to segment profit of RM1m in 3Q19, which we believe was contributed by PROTON, especially with the sales of higher margin all-new Proton X70 (30k units booking, 14k units delivered). This turnaround more than offset the flat sales of PROTON units sales at 15,511 units (0%) and Honda units sales at 22,367 units (-1%).

Outlook. Proton X70 was rolled out on 12th December 2018. Proton is in the midst of finalising a 10-year business road map targeting 30% share of the domestic market and 10% of regional market via introduction of new models. Specifically, the group is targeting to expand its products portfolio in the A, B, SUV and MPV segments for their export market. PROTON has recently launched the face-lifted Proton IRIZ and PERSONA based on the Proton X70 design. A new manufacturing plant in Tanjung Malim will be fully ready in five years’ time, but the first Proton car made with Geely’s technology will be rolled out by 2H19.

We cut our FY20E CNP by 43% to RM209m based on lower-thanexpected contributions from Automotive and services sectors as well as associates. We also introduce our FY21E CNP estimate of RM251m.

Downgrade to UP from MP with a lower Sum-of-Parts (SoP) Target Price of RM1.80 (from RM1.90), implying PER of 17x on FY20E EPS. Despite recording a turnaround in its core Automotive sector in 4Q19, significantly lower associate Honda’s contribution as well as expanded losses from Pos Malaysia may limit its net earnings growth in the upcoming quarters.

Key risks to our call are: (i) faster-than-expected roll-out of new models under the new Geely-Proton management, and (ii) higher-than-expected associates’ contribution.

Source: Kenanga Research - 31 May 2019