6MFY19 (due to change in FYE from Mar to Dec) core PATAMI of RM119m compared to core losses of RM76m in 6MFY18 came in within our expectation at 70%, but below consensus at 36%, of full-year estimate. No interim dividend was declared in this quarter as expected.

YoY, 6MFY19 recorded core PATAMI of RM119m compared to core losses of RM76m in 6MFY18 mainly from stronger sales by PROTON of 51,639 units (+42%) which drove Automotive segment stronger (sales +40%, segment profit of RM234m from segment losses of RM209m), and more than offset lower overall profit contribution from Services segment (-56%), Pos Malaysia, Property segment (-2%) and lower share of profits from associates’ (-31%), namely Honda, which recorded lower sales at 42,933 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 6MFY19 core losses widened to RM44m compared to RM11.6m in 6MFY18 due to: (i) continuous structural decline in traditional mail volume largely on electronic substitution, and (ii) higher losses at International segment.

QoQ, 2QFY19 core PATAMI plunged 29%, despite the increase in revenue (+5%), affected by lower profit contributions from Automotive segment (-8%), Services segment (-6%), and Associates’ share of profit (-33%), but cushioned by Property sector (+105%). The Automotive segment registered dismal profit, despite higher overall revenue (+8%) and PROTON recording better unit sales (+5%) mainly from unfavourable vehicles mix (PROTON vehicles mix was skewed towards lower-margin vehicles with Proton X70 recorded lower sales (-15% QoQ). Whereas, Associates’ lower share of profit, namely Honda, recorded lower unit sales (-5%), while Services segment’s lower contribution came from POS’ 2QFY19 losses which widened to RM29.3m from RM15.1m in 1QFY19 due to widening losses from international (+90%) and mail (+1%) segments albeit a large base effect as a result of declining mail volumes.

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 1QCY20. 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).

Maintain MARKET PERFORM with unchanged Sum-of-Parts (SoP) TP of RM2.60. Our TP implied PER of 16.4x based on FY20E EPS (at peers’ average mean PER).

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

Source: Kenanga Research - 29 Nov 2019