Stock Name: PROTON
Company Name: PROTON HOLDINGS BHD
Research House: AMMB
Proton Holdings Bhd
(May 5, RM4.80)
Maintain buy at RM4.99 with fair value RM6.30: Euromobil Sdn Bhd, a subsidiary of DRB-Hicom which recently secured an exclusive distributorship for Audi models in Malaysia, has expressed interest to assemble Audi vehicles locally, if it could reach minimum sales volume of 1,000 units per annum - according to press reports. This year, Audi sales averaged 53 units per month, up 36% from 39 units per month in 2009.
In a related development, press reports indicated that Proton is considering consolidating its manufacturing operations and highlighted possibilities of divesting its Shah Alam plant.
Our channel checks suggest that if Proton succeeds in securing a strategic partner to take up its spare capacity, there is less need to consolidate its manufacturing operations, but if a strategic partnership is sealed solely based on a technical collaboration, asset sales could come into play. Gains from sale of Proton's Shah Alam plant are estimated at RM442 million (based on RM60psf market value). Proton's Shah Alam assets, which have not been revalued since 1983, are currently valued at RM147 million in its books.
To put things in perspective, should DRB-Hicom succeed in securing rights to contract assemble VW models, it may opt to acquire Proton's Shah Alam plant to complement existing operations. DRB's Pekan plant only entails a capacity of 60,000 vehicles per annum (on two shifts) versus Proton's Shah Alam plant's 220,000 vehicles per annum. Talks between Proton and VW are ongoing, and notably, Audi is part of the larger VW group. Collectively, VW and Audi generate sales of 1,100 units per annum in Malaysia. The assembly of Audi vehicles by DRB-Hicom provides a strong basis for it to assemble VW marques as well, considering similar platforms and part commonisation questioning Proton's position in VW's whole scheme of plans for local assembly of VW models.
Political pressure imposed on Proton could likely expedite decision making on Proton's strategic partner, in our view.
We do not rule out possibilities of equity participation/exchange in DRB-Hicom should DRB-Hicom acquire the right to assemble VW models, which could eventually lead to VW using Malaysia as an export hub for the Asean region.
DRB Hicom has a market capitalisation of RM2 billion, but notably, a net cash of some RM3.3 billion.
We maintain our buy rating on Proton at a fair value of RM6.30 per share, pegged to 0.7 time FY11 adjusted net tangible asset (NTA) of RM7.70 per share. When talks were initiated with VW in 2006, Proton's valuation rerated up to over one times adjusted NTA and 0.7 time price-to-book value (PBV). Current valuations are at deep 40% and 43% discount respectively. - AmResearch, May 4
This article appeared in The Edge Financial Daily, May 6, 2010.
Company Name: PROTON HOLDINGS BHD
Research House: AMMB
Proton Holdings Bhd
(May 5, RM4.80)
Maintain buy at RM4.99 with fair value RM6.30: Euromobil Sdn Bhd, a subsidiary of DRB-Hicom which recently secured an exclusive distributorship for Audi models in Malaysia, has expressed interest to assemble Audi vehicles locally, if it could reach minimum sales volume of 1,000 units per annum - according to press reports. This year, Audi sales averaged 53 units per month, up 36% from 39 units per month in 2009.
In a related development, press reports indicated that Proton is considering consolidating its manufacturing operations and highlighted possibilities of divesting its Shah Alam plant.
Our channel checks suggest that if Proton succeeds in securing a strategic partner to take up its spare capacity, there is less need to consolidate its manufacturing operations, but if a strategic partnership is sealed solely based on a technical collaboration, asset sales could come into play. Gains from sale of Proton's Shah Alam plant are estimated at RM442 million (based on RM60psf market value). Proton's Shah Alam assets, which have not been revalued since 1983, are currently valued at RM147 million in its books.
To put things in perspective, should DRB-Hicom succeed in securing rights to contract assemble VW models, it may opt to acquire Proton's Shah Alam plant to complement existing operations. DRB's Pekan plant only entails a capacity of 60,000 vehicles per annum (on two shifts) versus Proton's Shah Alam plant's 220,000 vehicles per annum. Talks between Proton and VW are ongoing, and notably, Audi is part of the larger VW group. Collectively, VW and Audi generate sales of 1,100 units per annum in Malaysia. The assembly of Audi vehicles by DRB-Hicom provides a strong basis for it to assemble VW marques as well, considering similar platforms and part commonisation questioning Proton's position in VW's whole scheme of plans for local assembly of VW models.
Political pressure imposed on Proton could likely expedite decision making on Proton's strategic partner, in our view.
We do not rule out possibilities of equity participation/exchange in DRB-Hicom should DRB-Hicom acquire the right to assemble VW models, which could eventually lead to VW using Malaysia as an export hub for the Asean region.
DRB Hicom has a market capitalisation of RM2 billion, but notably, a net cash of some RM3.3 billion.
We maintain our buy rating on Proton at a fair value of RM6.30 per share, pegged to 0.7 time FY11 adjusted net tangible asset (NTA) of RM7.70 per share. When talks were initiated with VW in 2006, Proton's valuation rerated up to over one times adjusted NTA and 0.7 time price-to-book value (PBV). Current valuations are at deep 40% and 43% discount respectively. - AmResearch, May 4
This article appeared in The Edge Financial Daily, May 6, 2010.
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