Proton also needs to develop a solid business plan.
KUALA LUMPUR: CIMB Equities Research is retaining its earnings forecast for DRB-Hicom pending further development while keeping its target price of RM1.60 and Add call.
The research house said on Tuesday it met with DRB-Hicom’s management and is positive that the search for a strategic foreign partner for Proton is on track and the company is anticipating higher sales volume on-year from the new car models.
Also the five-year moratorium period on the loan from the government will augur Proton’s revival plans and the new models will likely boost Proton’s sales volume on-year.
Despite ambiguities in the terms of partnership structure, the search for a strategic foreign partner for Proton is well on track. DRB reiterated it has received responses from a number of OEMs after sending Request for Proposals (RFPs) and will soon deliberate on potential partners, based on what the OEMs have proposed.
“A hindrance to the process will be reaching amicable terms, in our view,” it said.
From Proton’s point of view, apart from capitalising on the partner’s advanced technology, global reach and achieving economies of scale, it would also require capital injection. Proton will also most likely want to retain its brand name, given the national value attached.
Its two underutilised plants (total capacity of 350,000) are part of the reason it wants to attract foreign partners, apart from its readily available distribution channels.
“Recall that the government approved a soft loan of RM1.5bil to Proton, with conditions attached. The bulk of the loan came in the form of RM1.25bil worth of redeemable convertible cumulative preference shares (RCCPS), to be used for cashflow management and to settle its outstanding payables, which stood at RM2.3bil as at end-FY15,” it said.
CIMB Research pointed out the loan has been disbursed, with three repayment tranches. There is a moratorium period of five years for dividend, conversion and redemption of the RCCPS. This bodes well for Proton, as it can focus on reviving the company within this period before having to repay the loan. DRB intends to redeem the shares in the future.
The remaining RM250mil loan amount will be disbursed, pending shareholder’s approval during DRB’s AGM next month. However, the mode of instrument for the loan is still unknown.
The research house also said after the launch of Perdana in Jun, Proton will launch new models over the next few months. Persona will be rolled out as early as next week, with Saga and the Suzuki-based MPV model in September and October, respectively. Another collaboration with Suzuki is expected to be launched early next year, based on its SUV model Vitara.
“The current sales target of 120,000 is a stretch, given the first six months of 2016 sales of 39,000. However, management is confident of at least surpassing last year’s sales volume of 95,000 given the new launches.
“Despite competition from Perodua Bezza, it believes the launches will be able to cater to a wider range of audience. Persona has been open for booking, and management is targeting 3,000 units/month. We believe Persona may be able to capture the audience interested in the higher-end of an entry-level model.
“We are positive that (i) the search for a strategic foreign partner is on track, and (ii) it is anticipating higher sales volumes from the new models, vs. last year. However, we are slightly concerned the take-up rates for Proton’s new models will be slightly muted, especially for Saga, given the overwhelming response to Perodua Bezza.
“Note that Saga typically makes up 50% of Proton’s total sales. If the response to these new models is underwhelming, Proton’s financials will continue to be strained,” said CIMB Research.
