Proton Holdings Bhd
(April 7, RM4.83)
Reiterate buy at RM4.84, with a higher fair value of RM6.30: This valuation follows upward revisions to our adjusted net tangible asset (NTA) projection, to factor in market value of Proton's Shah Alam assets.
Our channel checks suggest possibilities of foreign carmakers taking up spare capacity and simultaneously, striking a strategic alliance with Proton.
We understand that Proton is in talks with a third original equipment manufacturer (OEM) namely Mitsubishi, besides Renault and Volkswagen currently. Negotiations with Mitsubishi go beyond model specific developments and platform sharing that was agreed upon earlier.
Proton's manufacturing assets have turned increasingly strategic following growing interest by foreign carmakers to set up assembly operations in the country and recent news flow suggests VW is looking to finalise plans for a local assembly plant by the end of this year.
Additionally, the government's move to lift a freeze on manufacturing licences for luxury passenger vehicles with engine capacities of 1.8cc and above should attract interest from luxury makes in the country.
Besides BMW, Mercedes, Peugeot and Volvo, the other luxury marques that lack manufacturing presence here are VW, Audi, which is also under the VW group, Renault and Porsche.
VW initiated talks with Proton in October 2004. Since then, talks between Khazanah and VW have been rough.
While talks were revived late 2005, this too ended in disappointment - understood to be caused by the reluctance of the government to give away a controlling stake in Proton and monetary demand by VW from the government to streamline Proton's operations.
In the past couple of months however, relations have been warming up and VW has been reported to be back on the negotiating table with Proton.
What might VW bring to Proton? We think VW has the technology, economies of scale, global reach and excellent commitment to quality that Proton needs to become a global player. VW has been successful in the car business, having successfully built various models across its marques by using only four platforms.
Out of the key manufacturing plants in the country, Proton's plants entail the largest capacity, at a collective 400,000 units per annum, by a very large gap and remains well under utilised. Currently, the plants have a 50% utilisation rate, which leaves ample excess capacity to undertake contract assembly operations.
Proton's Shah Alam assets that measure over 200 acres (81ha) have not been revalued since 1985, entailing a book value of just RM147 million.
We have revised up our adjusted NTA projection to RM7.70 per share from RM6.50 previously to factor in market value of Proton's Shah Alam assets at an assumption of RM60 psf, which contributes to a surplus of 80 sen per share or RM440 million.
We do not rule out future divestment of Proton's plant in Shah Alam given its future status as a non-core asset - should Proton decide to consolidate operations to Tanjung Malim.
Proton announced earlier in the year that it is exploring possibilities of either selling or leasing out its plant in Shah Alam, where a decision will be made during the second half of 2010.
Proton is one of the cheapest auto stocks under our coverage at just six times FY11 earnings. Net cash accounts for 22% of market cap and ex-cash, Proton trades at five times FY11 earnings per share (EPS).
Additionally, when talks were initiated with VW in 2006, Proton's valuation re-rated upwards to over one time adjusted NTA and 0.7 times book value. Current valuations are at deep 40% and 43% discount respectively. - AmResearch, April 7
This article appeared in The Edge Financial Daily, April 8, 2010.
(April 7, RM4.83)
Reiterate buy at RM4.84, with a higher fair value of RM6.30: This valuation follows upward revisions to our adjusted net tangible asset (NTA) projection, to factor in market value of Proton's Shah Alam assets.
Our channel checks suggest possibilities of foreign carmakers taking up spare capacity and simultaneously, striking a strategic alliance with Proton.
We understand that Proton is in talks with a third original equipment manufacturer (OEM) namely Mitsubishi, besides Renault and Volkswagen currently. Negotiations with Mitsubishi go beyond model specific developments and platform sharing that was agreed upon earlier.
Proton's manufacturing assets have turned increasingly strategic following growing interest by foreign carmakers to set up assembly operations in the country and recent news flow suggests VW is looking to finalise plans for a local assembly plant by the end of this year.
Additionally, the government's move to lift a freeze on manufacturing licences for luxury passenger vehicles with engine capacities of 1.8cc and above should attract interest from luxury makes in the country.
Besides BMW, Mercedes, Peugeot and Volvo, the other luxury marques that lack manufacturing presence here are VW, Audi, which is also under the VW group, Renault and Porsche.
VW initiated talks with Proton in October 2004. Since then, talks between Khazanah and VW have been rough.
While talks were revived late 2005, this too ended in disappointment - understood to be caused by the reluctance of the government to give away a controlling stake in Proton and monetary demand by VW from the government to streamline Proton's operations.
In the past couple of months however, relations have been warming up and VW has been reported to be back on the negotiating table with Proton.
What might VW bring to Proton? We think VW has the technology, economies of scale, global reach and excellent commitment to quality that Proton needs to become a global player. VW has been successful in the car business, having successfully built various models across its marques by using only four platforms.
Out of the key manufacturing plants in the country, Proton's plants entail the largest capacity, at a collective 400,000 units per annum, by a very large gap and remains well under utilised. Currently, the plants have a 50% utilisation rate, which leaves ample excess capacity to undertake contract assembly operations.
Proton's Shah Alam assets that measure over 200 acres (81ha) have not been revalued since 1985, entailing a book value of just RM147 million.
We have revised up our adjusted NTA projection to RM7.70 per share from RM6.50 previously to factor in market value of Proton's Shah Alam assets at an assumption of RM60 psf, which contributes to a surplus of 80 sen per share or RM440 million.
We do not rule out future divestment of Proton's plant in Shah Alam given its future status as a non-core asset - should Proton decide to consolidate operations to Tanjung Malim.
Proton announced earlier in the year that it is exploring possibilities of either selling or leasing out its plant in Shah Alam, where a decision will be made during the second half of 2010.
Proton is one of the cheapest auto stocks under our coverage at just six times FY11 earnings. Net cash accounts for 22% of market cap and ex-cash, Proton trades at five times FY11 earnings per share (EPS).
Additionally, when talks were initiated with VW in 2006, Proton's valuation re-rated upwards to over one time adjusted NTA and 0.7 times book value. Current valuations are at deep 40% and 43% discount respectively. - AmResearch, April 7
This article appeared in The Edge Financial Daily, April 8, 2010.
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