Proton - TRADING BUY - 27 May 2008

Proton - FY08 earnings back to the black (Results Note)



Price: RM3.74

Target Price: RM5.40

Recommendation: TRADING BUY



· FY08 net profit above expectations on recognition of RM194m R&D grant. FY08 net profit of RM202.9m beats our forecast and consensus' net loss of RM28.7m and RM43.5m respectively. This is largely due to receipt of the RM194m R&D grant from the government. Stripping out the grant, net recurring profit of only RM8.9m augmented by RM40.6m of write back of tax overprovision was still above expectations.

· YoY, FY08 net profit returned to black from a net loss of RM589.5m in FY07. The huge improvement was driven mainly by: (1) stronger sales volume with better profit margins; (2) new income of RM32.0m from sale of rights for use of Intellectual Property Rights (IPR) in China market and (3) recognition of tax-exempt R&D grant of RM194.0m offered under the National Automotive Policy (NAP).

· Saddled with increase amortisation of not so successful models. The lower profit was impacted mainly on the back of additional depreciation of the new Saga, accelerated amortisation of the Savvy and increase in operating costs due to some write-offs and higher manufacturing overhead.

· 4Q08 net recurring profit of RM42.4m was significantly higher than in 4Q07 and 3Q08 of RM0.9m and RM10.3m respectively, mainly on the back of RM42.9m reversal over provision of income tax.

· FY09 and FY10 net earnings upgraded to RM236.2m and RM238.6m from previous estimates of RM25.9m and RM43.7m, respectively. Our new forecasts were adjusted significantly to account for the encouraging strong sales of Proton new models to-date, and operational improvements from cost reduction initiatives which are beginning to show positive results.

· Maintain Trading BUY with unchanged Target Price of RM5.40 based on P/NTA of 0.6x. Long term strategy remains uncertain for Proton.







KENANGA INVESTMENT BANK BERHAD (15678-H)