1Q19 (due to change in FYE from Mar to Dec) core PATAMI of RM46m (-75% QoQ, core losses of RM67m in 1Q18) came in below our/consensus expectations at 15%/14% of full-year estimates due to weaker-than-expected Automotive segment’s contribution. As such we cut our FY19-20E CNP by 43-12%. Downgrade to UP from MP, but with a higher SoP TP of RM2.60 (from RM2.20) based on revised SoP composition.

1Q19 (due to change in FYE from Mar to Dec) core PATAMI of RM46m (-75% QoQ, core losses of RM67m in 1Q18) came in below our/consensus expectations at 15%/14% of full-year estimates due to weaker-than-expected Automotive segment’s contribution. No interim dividend was declared in this quarter as expected.

YoY, 1Q19 recorded core PATAMI of RM46m compared to core losses of RM67m in 1Q18 mainly from stronger sales by PROTON at 25,237 units (+14%) which drove Automotive segment stronger (sales +59%, segment profit RM91m from segment losses of RM188m), and more than offset lower overall profit contribution from Services segment (-34%), Pos Malaysia, Property segment (-33%) and lower share of profits from associates’ (-15%), namely Honda, which recorded lower sales at 22,070 units (-23%), as consumers held back purchases in anticipation of newer models. Proton was buoyed by the all-new Proton X70 (CBU), and supported by face-lifted Proton variants. Pos Malaysia’s 1Q19 entered into a loss of RM15m compared to net profit of RM5m due to widening losses from mail segment (+65%) as a result of declining mail volumes (-18%).

QoQ, 1Q19 core PATAMI plunged 75%, despite the marginal decrease in revenue (-1%), affected by lower profit contributions from Automotive segment (-65%), Property segment (-85%), and Associates’ share of profit (-64%), but cushioned by Services sector (+85%) which we believe came from better Banking segment’s contribution. The Automotive segment registered dismal profit, despite PROTON recording better unit sales (+63%) mainly from unfavourable vehicles mix (PROTON vehicles mix skewed towards lower-margin vehicles with Proton X70 recorded lower sales to 6,615 units (-23% QoQ) as well as unfavourable timing of AV-8 completion (Defence sales: -10%). Whereas, Property segment’s lower profit was from lower recognition from construction-related projects, i.e. Media City Development and Associates’ lower share of profit, namely Honda, which recorded lower unit sales (-1%).

Outlook. 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 X70 CBU was rolled out on 12th December 2018, and the CKD version is poised to be realised in Nov 2019. PROTON has recently launched the face-lifted Proton Iriz, Persona and Saga based on the Proton X70 design. For 2H20, PROTON will launch Proton X50 (Geely Binyue).

We cut our FY19-20E CNP by 43-12%. We cut our FY19-20E CNP by 43- 12% to reflect lower-than-expected Automotive segment contribution as well as to reflect changes in FYE from Mar to Dec.

Downgrade to UP from MP, but with a higher Sum-of-Parts (SoP) TP of RM2.60 (from RM2.20), to reflect the changes in FYE, higher targeted PER valuation of Proton from 8x to 9x (based on growing national marques market share) and lower POS Malaysia’s TP. We are cautious on the potential risk of teething problem arising from the first batch of CKD delivery of Proton X70, which may register lower sales compared to the current CBU. Our TP implied PER of 16x based on FY20E EPS (at peers’ average mean PER). Key risks to our call are: (i) faster-than-expected roll-out of new models under the new Geely-Proton management, and (ii) higherthan-expected associates’ contribution.

Source: Kenanga Research - 26 Aug 2019