PROTON : Maintain HOLD at RM4.91 with FV of RM5

Proton recalls Satria Neo and Gen2

Proton Holdings Bhd
(Oct 8, RM4.87)
Maintain hold at RM4.91 with fair value of RM5: Proton Holdings is recalling 15,911 units of Satria Neo and Gen2 models made between 2004 and 2008 following potential safety concerns over a clock spring malfunction.

The clock spring connects switches and airbags to the radio, horn and cruise control. Routine tests by Proton have identified irregularities with the clock spring, including friction noise within the steering wheel, activation of horn or car lights without warning, audio control switch malfunction and in extreme cases, deployment of the driver’s side airbag.

Cost of the recall was not forthcoming in news reports. Nonetheless, we do not think Proton will bear 100% of the recall cost, as we would think that part of the fault lies with the suppliers. While the recall may have a certain amount of impact on Proton’s sales volume, we note that Satria Neo and Gen2 only account for 4% of Proton’s average monthly sales volume in 2010. Additionally, the quantum of recall is much smaller compared to the 34,000 units of the Savvy model that were recalled back in 2008 for wheel bearing problems.

Although recalls are negative on auto companies (depending on the magnitude of the recalls), it is not an uncommon occurrence for auto manufacturers. Toyota and Nissan had announced recalls of their products over the past 12 months — particularly the former. While Toyota’s recall did not affect models sold in Malaysia — buying sentiment was somewhat impacted.

Recall aside, fundamentally, we see Proton’s earnings revision cycle peaking. Positive catalysts going forward could be more structural in nature, but where we think a better time to revisit Proton would be towards year-end, when positive news flows would be more forthcoming that is (1) Waja replacement model launch; (2) Decision on plant consolidation, which should coincide with decision making on a strategic partner; (3) Finalisation of Indian market venture with a local partner, which will be one of Proton’s key overseas growth markets.

We reiterate our hold rating on Proton at an unchanged fair value of RM5 per share, pegging Proton to eight times FY11F earnings. — AmResearch Sdn Bhd, Oct 8


This article appeared in The Edge Financial Daily, October 11, 2010.