Investment Highlights

• We maintain an UNDERWEIGHT and FV of RM2.30/share for APM Automotive based on an unchanged FY19 PE of 11x.

• The FY18 results came above expectations but we retain our FY19–21 projections, as we consider the expectation for a single-digit growth in the coming years to be optimistic considering the group’s long-running trend of annual declines.

• APM’s FY18 core net profit of RM36.7mil exceeded both our expectations and consensus, which stood at RM28.8mil and RM31.2mil respectively.

• APM outperformed in 4Q as its top contributor to revenue, the interior and plastics division, saw its topline improve 22% YoY and margins climb back to 8% due to the addition of supply to one of its OEM customers.

• The result in 4Q compensated for the exceptional weakness seen in the two quarters prior, during which APM’s bottom line fell to single digit.

• However, the group marked its fifth consecutive decline in annual net profit albeit by a much lower quantum than before. Recall that the group failed to capitalize on the tax holiday in 3Q due to higher material costs, the effect of unfavourable foreign exchange and worsening losses overseas.

• APM’s net margin similarly declined to a historical low of 3% as several key segments saw their margins tighten and losses from its overseas ventures expanded.

• The former is especially true for the suspension division, which saw earnings fall by two-thirds amid a 6ppt decline in its margins. Margins for suspension now hover 2–7% from 10– 11% in the previous two years. This was primarily due to higher steel and energy costs, along with exports to markets that earn a lower margin.

• Its overseas ventures (captured by the Indonesia operations and others segments) saw a total loss before tax of RM13mil in FY18.

• APM attributed this to the startup costs from a new factory for shock absorbers in Indonesia, high input and operating costs in Vietnam, relocation costs from Australia and high operating costs in Thailand.

• The group declared total dividends of 12.0 sen/share or a payout of 61% in FY18 (vs. 13.0 sen and 67% in FY17). While forward yields of 4.3–4.5% are attractive, we remain concerned for the group’s vulnerabilities to external factors and volatility in earnings.

Source: AmInvest Research - 26 Feb 2019