Fair Value : RM3.60 | Recom : Outperform (Maintained)

Collaboration agreement with Honda. DRB announced that Proton has entered into a Collaboration Agreement with Honda Motor Co Ltd. The announcement to Bursa Malaysia was short of specifics but said that Proton and Honda will explore collaboration opportunities in the areas of technology enhancement, new product line up, platform and facilities sharing. The choice of partner was not anticipated and the timing of the announcement is sooner than expected.

A positive step forward for Proton. We consider the collaboration agreement with Honda to be a positive step forward for Proton. The arrangement could give Proton access to drive train and platform technology at a potentially lower cost given its current absence of economies of scale. Honda is an acknowledged leader in hi-tech engines with numerous products spanning across many product segments. However, we note that the announcement makes no mention of it being an exclusive agreement and does not preclude Proton from entering into other arrangements with other global OEMs. The maiden collaborative product with Honda could be a Perdana replacement model.

What’s in it for Honda? Honda already has an existing assembly plant in Peguh, Malacca in addition to a major facility in Ayutthaya, Thailand. The Thailand plant was badly affected by the floods in 2011 and the arrangement with Proton could be a means of mitigating risks by spreading out production capacity over multiple locations. Proton’s Tanjung Malim plant remains grossly under utilised and offers significant production capacity within a much shorter time frame than building a new plant on a greenfield site.

Forecasts. No change to our forecasts.

Risks. 1) Weaker economy affecting car sales; 2) Unfavourable forex trends; 3) Heightened price competition; and 5) Rising fuel costs.

Investment case. We reiterate our Outperform call on DRB. Our conservative sum-of-parts derived fair value is unchanged at RM3.60. We believe DRB has multi-year growth potential with significant under-valued assets. However, some degree of patience from investors will be needed as some time will be needed to implement new initiatives. Coming quickly on the back of the recent announcement on the proposed disposal of Hicom Power, we expect news flow to pick up pace over the next several months. This could include rationalisation plans for its sales and servicing network to eliminate overlaps between the EON and Proton Edar.

Source: RHB Research - 30 Oct 2012