OSK Research ups Proton to Buy, target price RM3.64

KUALA LUMPUR: OSK Investment Research is revising upwards its earnings for Proton Holding Bhd substantially to RM179mil and RM184mil for the financial years ending March 30, 2009 (FY09) and FY10 respectively.

“The potential re-rating catalysts are its long term plan for a strategic partnership to tap the export market as well as set up manufacturing plants,” it said in a research note issued on Thursday.

“We are upgrading Proton to a BUY on its short term turnaround. Blending a valuation mix of both 8.0 times forward price-to-earnings (PE) and 0.5 times price/net tangible asset (P/NTA), we arrive at a revised target price of RM3.64 (from RM3.34),” it said.

OSK Research said it was applying a 0.5 time P/NTA until a solid strategic partnership for Proton materialised.

On Wednesday, Proton announced net profit of RM52.02mil for the 1Q from a net loss of RM46.75mil a year ago. Revenue rose to RM1.71bil from RM1.14bil. Earnings per share were 9.5 sen from a loss per share of 8.5 sen.

The improvement in profitability was mainly due to Proton’s domestic sales volume growth of 55% on-year, underpinned by new models, the Persona and Saga.

OSK Research said Proton’s annualised revenue came in 7% below its expectation but was 1% above street estimates on lower-than-expected volume.

“But to our surprise, 1QFY09 accounted 87% of our full year forecast and 62% above consensus,” it said.

Hence, it was trimming its cost component assumptions as Proton was reducing its distribution and administrative costs to enhance operating efficiency and reduce the size of its distributorship network.

OSK Research said the overall expansion in Proton’s margins might possibly be due to Proton cutting on its distribution expenses by slashing the number of distribution outlets from 303 to 250 by end-FY09, as well as overhead costs by reducing its dependence on vendors (from 200 to150 by end-FY09).

However, the research house said it remained concern over rising raw material prices. The higher prices would ultimately raise its core earnings assumption to RM179mil (from RM59mil) for FY09 and RM184mil (from RM66.7mil) for FY10.

OSK Research added it was reaffirming its key assumptions on the increase in raw material prices (specifically carbon steel) by 18% and 8% for FY09 and FY10 respectively.