Investment Highlights

• We maintain our SELL call on APM Automotive with an unchanged FV of RM2.34 based on an FY20F PE of 11x.

• APM’s 1H19 core net profit of RM17.3mil was broadly in line with our expectations, accounting for 42% and 44% of our and consensus forecasts respectively. The group seasonally record a weak 2Q every year, so we expect earnings to improve in 2H19. On a cumulative basis, core earnings fell 6% YoY due to poorer performances from five of the group’s operating segments.

• APM’s poor performance for the quarter can be reflected in depressed profitability margins on all levels in a YoY comparison. This has ultimately led the group to register a core net margin of 2.4% in 1H19, compared to 3.0% in 1H18.

• Despite poorer earnings, APM managed to improve its top line in 1H19, recording a revenue of RM726.0mil (+18% YoY). This was heavily lifted by decent performances from two of its major segments: i) the interior plastics division and ii) non-reportable segment (Malaysia).

• APM’s suspension division continued to be in the red in 2Q19, recording a 1H19 loss before tax of RM0.5mil. 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 coupled with unfavorable product mix and lower production volume.

• APM’s only saving grace to its bottom line was the interior & plastics division, recording a 1H19 revenue of RM544.6mil and a PBT of RM43.3mil. The higher sales were highly attributed to higher demands from certain OEM customers following the supply of new parts for localization content and new model launches since the end of 2018. PBT margins was also superior at 7%.

• APM’s Indonesia operations widened its losses to RM6.5mil in 1H19 (+74% YoY) compared with an LBT of RM3.7mil in 1H18. This was due to the rising costs of raw materials, low production volumes and higher operating costs especially depreciation and interest expense.

• APM declared a dividend of 5 sen in the quarter. This translates into a 1H19 payout ratio of 53%, and a dividend yield of 2.1%. APM’s balance sheet remains healthy as the group maintained its net cash position of RM137.9mil. With that said, we have imputed a payout assumption of 60% for FY19. This translates into a decent dividend yield of 5.3%.

Source: AmInvest Research - 28 Aug 2019