Longer turnaround seen for Proton which is still making losses


PETALING JAYA: The turnaround of Proton Holdings Bhd under DRB-Hicom Bhd is expected to take longer than expected as the national carmaker continues to bleed red ink and see its market share shrink.

The drag on DRB-Hicom caused by Proton has seen some analysts trim their forecast earnings for the parent company as they don’t believe Proton would be able to reverse its fortunes by DRB-Hicom’s financial year 2015. Its financial year is from April 1 to March 31.

DRB-Hicom closed down 7 sen to RM2.48 yesterday on a trading volume of 3.384 million shares.

Analysts, who were earlier encouraged by Proton’s financial performance during DRB-Hicom’s second quarter, said the jump in Proton’s sales during that period was short-lived as sales of the national car then fell close to a third in the third quarter.

Total Proton unit sales in the period fell by 29% quarter-on-quarter to 30,117 while market share dropped to 18.3% compared with 24.8% in the second quarter, said CIMB analyst Lucius Chong in a note yesterday.

Lucius estimated that Proton recorded an operating loss of RM105mil in the third quarter, noting that the ramp-up in sales of the Proton Saga SV was short-lived after its launch in the previous quarter.

Proton’s losses pulled down the financial performance of DRB-Hicom’s automotive division, which posted a pre-tax loss of RM67.2mil during the third quarter. DRB-Hicom posted a net profit of RM141.6mil in its third quarter.

He cut his forecast earnings for DRB-Hicom by 8% to 34% for the company’s current and next two financial years as he does not expect Proton to turn around during DRB-Hicom’s 2015 financial year.

“Thus, our target price is lowered by 7% as we now apply a 30% discount to DRB-Hicom’s net tangible assets instead of 20% because of the higher risk of Proton continuing to destroy value.”

On the launch of Proton’s global small car (GSC) in the first quarter of financial year 2015, which is between April and June this year, Lucius believes it is “also unlikely to leave a lasting impact, especially now that foreign completely-knocked-down (CKD) hybrids are tax-free under the National Automotive Policy 2014.

“And we believe that Proton will not achieve its target of doubling sales to 350,000 units by FY18,” he added.

As such, he believes Proton needs a foreign strategic partner to compete at home and break into export markets, as in the case with the Perodua-Daihatsu partnership.

Hwang-DBS analyst Chong Tjen San added that the turnaround plan at Proton was ongoing but it might be another year or two before the group saw sustainable profit growth.

Public Research analyst Lee Wee Sieng said that while concerns on Proton’s performance might weigh on DRB-Hicom, he believed the launch of Proton’s GSC in April would be a game-changer and that there would be more CKD assembly work coming DRB-Hicom’s way from Volkswagen for cars like Polo, Jetta and Passat.

News was also not good on DRB-Hicom’s other businesses as Lucius noted that Pos Malaysia Bhd and the group’s concession business, Alam Flora, were hit by higher operating costs.

The saviour for the group though was Bank Muamalat, which helped push earnings before tax and interest of its services division up 9% year-on-year and 55% quarter-on-quarter to RM160mil.

“However, we expect DRB-Hicom to sell or pare down its 70% stake in Bank Muamalat. This will leave DRB-Hicom with a lack of earnings drivers,” said Lucius.

Lee was a little more optimistic over the long-term prospects of DRB-Hicom as he felt the current share price of the company was not reflective of the potential and underlying value of the group's assets.

He said DRB-Hicom had a 70% stake in Bank Muamalat, 32%-stake in Pos Malaysia and prime land bank and properties within the group.

He also viewed DRB-Hicom’s sale of UniAsia’s life and general insurance businesses positively, as this would help to unlock the value of legacy, non-core assets within the group. Tjen San also believed there was still deep value in DRB-Hicom with abundant synergies to be realised within the group.

“A case in point is the acquisition of Konsortium Logistik Bhd which will be an important link in its logistic puzzle.”

Group managing director Tan Sri Mohd Khamil Jamil did not respond to StarBiz’s queries at press time.

Meanwhile, there was talk about former Prime Minister Tun Dr Mahathir Mohamad leaving his role as adviser to Proton while Proton deputy chief executive officer Datuk Lukman Ibrahim’s reported resignation has yet to be explained by the group.

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