Proton - Comeback

Proton has seen some of the worst years in it's time as a National car-maker leading people to think it was better left to rot without throwing more good money into it. But as national pride goes, the car-maker has seen some improvement in the way it is run. It'll be a long story indeed if political ramblings and commentaries are included so I'll just stick to financial facts reported in the past year.

Even as early as March 2009, they were still making losses but the bottom line has improved a lot with the cost improvement and better model role-out lately. Past 3 quarters it has reported earnings that has naturally propelled its stock to higher ranges. It is also very surprising to know that the NTA for this company is a staggering RM9+ compared to the current price of RM4.75 or even RM3.80 in the beginning of the year. Goes to show how much margin of safety the market has about the prospect of Proton.

Cash levels are currently healthy with enough to cover it's total debt obligations although the receivables and payables are in billions. Since its a capital intensive industry, cash levels are normally expected to be even higher serviced by debts and bonds.

The car industry in Malaysia is expected to expand this year as buyers take advantage of the lower loan rates. With the imminent normalization or interest rates in the coming quarters, buyers are pressured to make their purchases this year compared to next. This is especially true for budget car buyers/Proton buyers. With the country's IPI showing an increase in automobiles production, it is assumed that Proton will be looking at another quarter of profits which would cap 2010 as a profitable year for Proton.

Although a long shot, Proton might be giving out dividends for a profitable year. FY2009 closed red but they still gave out a 5 sen dividend due to improving business. Expected EPS for Proton FY2010 is around 45 sens conservatively, dividend yield expected to be no more than 20% of EPS.

Conclusion

Buying Proton share is like betting on the Malaysian car industry. Saturated and competitive. It's too bad Perodua is not listed since it would be the healthier of the two. But Proton shares will appreciate based on its financial performance, and the best way to profit from that is not Proton shares but their respective structured warrants namely Proton-CB by CIMB and Proton-CC by OSK.

Both have at least 4 more months before maturity, Proton-CB has strong daily volume but higher premium compared to Proton-CC with lower volume but trading at a discount. Although both recently dropped out of the "in the money" category after the recent sell-down. It's a good alternative to hitch a ride on the Proton train. Structured warrants do carry leverage risks though and since it has a rather limited lifespan, it is considered speculative in nature.