Tuesday, October 13, 2009

Is Proton a value trap?

Some stocks though are cheap but it could remain cheap. Is Proton one of them?

CIMB Research has maintained that PROTON HOLDINGS BHD [] is a trading buy at RM4 with a target price of RM6.05, stating that recent reports of DRB-HICOM BHD []’s bid for a 32% stake in the national carmaker wasn’t unexpected.

“Overall, we are neutral on DRB-Hicom’s bid for Proton. While there is potential for synergies, we do not see how DRB-Hicom, a conglomerate with diverse operations, will be able to transform Proton into a globally competitive entry,” said CIMB.

While CIMB is encouraged by Proton’s recent turnaround, the research house believed that a tie-up with an experienced and reputable foreign partner is what paves the way for technological exchange, and that is what national carmaker needs to stay ahead in the competitive industry.


I'm not a fan of heavy industry, it will drive me even further away especially the government has to justify their national pride or thinking it's a national security thinge.

Before I comment on Proton, look the first class one first - Toyota. It has a market cap of US $ 122 B vs Proton US $ 644M. Despite of its world class execution and innovation, return on equity(%) 11, 11, 8 for 2006, 2007, 2008 and losing money for 2009.

We need to put different emphasis on different measurement metric for different industry. In heavy industry, I think Price/EBITDA is important because it represent the ability to generate cash flow. Price/EBITDA(X) comparison is as follow for2007/2008/2009

Toyota 5.5/3.15/11.81
Proton not available/7.4/7.34

Only one aspect of valuation seems to be cheap, Proton has a Price/Book Value of 0.4 vs. Toyota 1.2X. But then Toyota is a global brand and generating at least close to double digit ROE.

So, the only way for shareholders to realize their investment is to hope for somebody to show up to buy them. If someone want to set-up a new operations, it is going to cost them some money. It's going to cost them about the same book value(assuming Proton acquiring all the assets efficiently). IF the share price is about RM 4, its BV is about RM 10 based on P/BV of 0.40. CIMB argues that Proton has been trading around 10 year historical P/BV of 0.8(BV RM 8), if there is a real genuine car maker were to enter paying RM 6, they are still getting 40% discount to BV or 25% discount to historical traded P/BV.

I don't see DRB-Hicom can add value as a new partner. However, are they buying a stake from the government so that they can get around the political BS to resell it to others? In other word, is this a first step for more serious reform? A Yes will increase odds a lot better. If not, it's a value trap -- a Graham's dog.

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