Investment Highlights

• We downgrade APM Automotive to UNDERWEIGHT from HOLD and cut our FV to RM2.30/share from RM3.10 after earnings disappointed for a second consecutive quarter. Our FV is based on an unchanged FY19F PE of 11x. We have trimmed our FY18 projection by 42% and FY19-20 projections by 26% to account for weaker sales and higher operating costs.

• 9MFY18 core net profit of RM21mil met only 43% of our FY projection and 48% of consensus. Higher revenue from the tax holiday in 3Q failed to deliver strong bottom line results due to higher material costs, the effect of unfavourable foreign exchange on a number of its key segments and worsening losses from Indonesia.

• 3QFY18 revenue was higher 15% YoY as total industry production improved 11% YoY due to a boost from the tax holiday in June-Sep. However, its core net profit of RM3.5mil was a decline of 75% YoY and the second consecutive quarter of single-digit bottom line results as its operating margin remains suppressed on the aforementioned factors.

• For the YTD period, core net profit was cut by nearly a third on a YoY basis due to weakness in the last two quarters. Revenue was up 11% YoY as its top 3 segments saw better sales but the pre-tax results for those segments were varied.

• Interior & plastics is still the dominant segment and accounted for nearly half of its YTD revenue. This is followed by the marketing and suspension segments, which accounted for 15% and 13% of revenue respectively.

• The first two — interior & plastics and marketing — were able to reap better pre-tax results from the higher sales to its domestic and foreign clients. Margins for both segments improved slightly and APM attributed this to a better product mix.

• However, the suspension segment saw a PBT drop 52% despite a 17% rise in revenue as margins were cut by more than half (to 4% from 10%) on rising steel costs, unfavourable export prices and a reversal on provision. The decline has been most visible for this segment, which has seen its PBT margin hover at 2-7% YTD vs. 10-11% in the past two years.

• Overall, the results were lacklustre and the group’s vulnerabilities to various external factors meant it could not capitalize on the boost in production from the tax holiday. Its YTD dividend payout of 5.0 sen translates to a payout of 46% of EPS (vs. 4.5 sen and 34% in 9MFY17). Forward yields of 2.3- 3.3% based on a payout assumption of 50% are unexciting.

Source: AmInvest Research - 19 Nov 2018