While we recognise that Proton still faces many challenges ahead amidst difficult market conditions, the elimination of legacy management issues and the recognition of the importance of strategic partnerships could be the first steps along its new journey. The availability of new models and the injection of funding, would help to tide Proton over in the near term. Its key milestones would be the identification of a new foreign strategic partner and a solution to raise utilisation rates. Maintain BUY on DRB with a higher TP of MYR1.30 (from MYR1.14), offering a 19% upside.

What’s good for Proton is good for DRB. We believe Proton is already trading close to trough valuations and presents a strong case from a risk -reward perspective. DRB-HICOM (DRB) owns other profitable businesses and valuable assets but trades at a fraction of its book value. Applying a P/BV of 0.35x (from 0.3x) that is a 50% discount to its 5-year median P/BV derives a TP of MYR1.30 (from MYR1.14). The higher TP is to reflect the increased impetus to prioritise a sustainable turnaround at Proton that could be a major re-rating catalyst for DRB.

Lifeline for Proton. The Government has approved Proton’s application for a MYR1.5bn soft loan after a Cabinet meeting last Friday. The funding, whichwould help Proton meet its immediate financial commitments, comes a week after Tun Dr Mahathir Mohamad resigned from his position as chairman of the national car maker. While Tun is Proton’s biggest supporter, his political stance has affected the company’s ability to secure additional government assistance.Strings attached. International Trade and Industries Minister Datuk Seri Mustapa Mohamed said Cabinet agreed to the loan on condition that Proton formulates a comprehensive turnaround plan to improve its competitive edge at the international level. He said that Performance and Management Delivery Unit (Pemandu) CEO Datuk Seri Idris Jala would head a special taskforce overseeing this turnaround, which would also include three government appointments and three appointments from the private sector. In an earlier statement, Datuk Seri Mustapa said that government assistance was conditional on the identification of a foreign strategic partner.

All change at Proton. In addition to a new CEO, we expect to see some new Proton models emerging over the next 12-18 months beginning with the Perdana. This is a D-segment product that uses a re-skinned version of the previous generation Honda Accord. A new Persona which is a sedan version of the Iriz hatchback is expected by end-2016. The first product from the collaboration with Suzuki is reported to be a 3-row, 7-seater multi-purpose vehicle (MPV). New product offerings should freshen Proton’s model line-up and appeal to a wider range of potential customers. Risks include a weakening of the MYR and a deterioration of consumer sentiment. We leave our estimates unchanged for now, pending greater clarity on Proton’s revamped business model.