Investment Highlights

• We maintain our UNDERWEIGHT call on APM Automotive but raised our FV to RM2.34 (from RM2.30 previously) based on a rolled-over valuation to FY20 with a PE of 11x.

• APM’s 1Q19 core net profit of RM11.5mil was in line with our expectations, accounting for 28% and 30% of our and consensus forecasts respectively. On a QoQ and YoY basis, core earnings fell 26% and 29% respectively due to poorer performances from five of the group’s operating segments.

• On a YoY basis, APM’s weaker performance for the quarter was reflected by the depressed profit margins on all levels. The group registered a lower core net margin of 3.1% in 1Q19 compared with 5.1% in 1Q18 and 4.1% in 4Q18.

• Despite the poorer earnings, APM maintained a steady topline of RM367.6mil (-4% QoQ, +15% YoY). This was contributed significantly by decent performances from two out of three of its three biggest segment. The decrease in revenue from the suspension division (-12% YoY) was mitigated by stellar performances from the interior & plastics division (+30% YoY) and non-reportable segment division (+19% YoY).

• APM’s suspension division sank into the red for the first time, recording a loss before tax of RM0.3mil. This was due to heightened cost of sales from higher raw material and energy costs in manufacturing the division’s full range of suspension kits. The division’s substandard performance for the quarter was also caused by lower demand from foreign markets (i.e. Russia and Australia).

• APM’s saving grace was the interior & plastics division, recording a 5-year high in revenue of RM282.5mil. Despite a drop in total industry production (TIP) to 144.7K units (- 7% YoY) for 1Q19, the division managed to ramp up its OEM supplies for localized content and an undisclosed new vehicle model which was launched in 4Q18, resulting in the spectacular performance for the division. PBT margin was also superior at 9%, resulting in a PBT of RM24.1mil. This was due to an advantageous product mix that contributed to the division’s improved profitability.

• APM did not declare any dividends in the quarter. This is unsurprising as the group typically pays out dividends in the second and fourth quarters of every financial year.

• APM’s balance sheet remains healthy as the group maintains its net cash position of RM277.3mil. With that said, we have imputed a payout assumption of 60% for FY19 and FY20. This translates into decent dividend yields of 4.2% and 4.3% respectively.

Source: AmInvest Research - 27 May 2019