KUALA LUMPUR: Proton Holdings Bhd plunged as much as 29 sen or 6% yesterday in a knee-jerk reaction to news that the national carmaker had failed in its latest attempt to forge a strategic partnership with Germany’s Volkswagen (VW).

The stock traded at an intra-day low of RM4.44 versus its opening and intra-day high of RM4.60 before paring down the losses in mid-afternoon trade and closing at RM4.55 for a loss of 18 sen or 3.8%. A total of 2.53 million shares changed hands.

The Edge Financial Daily yesterday reported Proton as saying it had been informed by VW during preliminary talks between them that a potential collaboration with the Malaysian carmaker could not be pursued as VW had “other priorities”.

It confirmed speculation in recent weeks that Proton’s proposed deal with VW would not materialise.

In its report yesterday, CIMB Research downgraded Proton to neutral at RM4.73 from a trading buy and cut its target price to RM5.60 (from RM6.30) after the latest development, which was negative news as Proton needed a strategic partnership to boost its competitive edge, and the lack of near-term catalysts.

“Since our upgrade of the stock from neutral to trading buy on expectations of positive news flow on a tie-up with VW and the improvement in its earnings prospects, the share price has risen 26% against 7% for the KLCI.

“Although we are encouraged by Proton’s turnaround in financial performance, we think that this has been partly reflected in the recent share price run-up,” it said.

“We retain our earnings forecasts but cut our target price from RM6.30 to RM5.60 as we widen the discount to its 10-year historical P/BV (price-to-book value) of 0.8 times from 20% to 30%.

“Tan Chong (outperform) is our top pick for exposure to the auto sector,” CIMB Research said.

Proton is also contemplating a sale of a 40% stake in its wholly owned Lotus to its management team as a performance incentive, according to The Edge weekly.

The research house said it was neutral on the news as the attractiveness of the sale depended very much on the sale price.

Meanwhile, OSK Research maintained a buy on Proton but cut its target price on the stock to RM5.67 from RM6.94 previously as it trimmed the price-earnings ratio (PER) from 11 times to nine times on FY11 earnings on the back of the negative development and the lack of positive news development over the near term.

It said the near-term outlook over the next two years continued to be in Proton’s favour given the significant improvement in its operating landscape, which had yielded positive results on its network rationalisation and the continuity of its model pipeline.

However, OSK said it remained questionable how Proton would be able to penetrate the global market on a bigger scale, especially in the developed markets where competition would continue to be cornered by the Japanese and European makes.

“We believe the key to success for the marketability of Proton in the global market would be heavily dependent on its upcoming global compact car, the EMAS, on which Proton is collaborating with Mitsubishi, or even perhaps Renault,” it said.

OSK Research said when the Volkswagen deal was officially called off in November 2007, Proton’s price-to-net tangible assets (P/NTA) dropped from 0.53 times to 0.43 times in tandem with its share price retracement of about 19%.

“Six months before the deal was announced amid speculation, Proton’s valuation was hovering at 0.7 times. As such, we believe that Proton’s current pricing of only 0.53 times P/NTA has not included any collaboration with a strategic partner,” it said.

In its report yesterday, MIDF Research maintained its buy on Proton with an unchanged target price of RM5.80, which is pegged at 10 times FY11 earnings or 0.5 times its estimated P/BV for FY11.

“(There is) no change in our forecast and recommendation as we did not impute any impact of foreign collaboration in our forecast. Expect a knee-jerk reaction to this news — further weakness to share price may provide opportunity to buy at lower levels,” it said.

MIDF Research said VW announced in May 2007 that it planned to open a new assembly plant in Indonesia at a cost of €35 million (RM139.58 million) to assemble the VW Touran from CKD packs, and a full-scale manufacturing could begin in 2012.

It said Proton’s search for a foreign partner was not over and contract assembly could come together as a package in its ongoing talks for a strategic collaboration with a foreign car maker as it would not involve any equity sale.

This article appeared in The Edge Financial Daily, June 8, 2010.