Investment Highlights

• We are downgrading APM Automotive to SELL from HOLD with a lower FV of RM1.68 (from RM2.34) based on a lower FY20F PE of 10x (from 11x) as we expect APM’s Indonesian operations to continue dragging the group’s earnings.

• We trim APM’s FY19/20/21 core net profit forecast by 24%/21%/17% after factoring in lower production and higher operating expenses for the group’s associates in Indonesia into our estimates.

• APM’s 9M19 core net profit of RM18.9mil was below our expectations, accounting for only 46% and 48% of our and consensus forecasts respectively. Cumulative earnings fell 14% YoY due to poorer performances from six of the group’s major operating segments.

• APM’s weaker 9M19 earnings were contributed by depressed profit margins on all levels YoY. This has ultimately led the group to record a weaker core net profit margin of 1.7% in 9M19, compared to 2.3% in 9M18.

• Losses for APM’s Indonesia operations widened to RM14.8mil in 9M19 (+94% YoY) compared to an LBT of RM7.6mil in 9M18. This was due to the rising costs of raw materials, lower production volumes and higher operating cost. Besides that, the group’s associates in Indonesia was also negatively impacted by development costs for newer models and higher operating expenses. This resulted in a massive slid in associates contributions to -RM5.1mil for the quarter.

• APM’s suspension division returned to the black in 3Q19 after being in the red in 1Q19 and 2Q19 with a marginal PBT of RM0.7mil. Overall in 9M19, the division recorded a 9M19 total PBT of RM0.2mil (-97% YoY) compared to RM6.9mil in 9M18, supported by a variation of product mix and lower production volume. The division’s deteriorated performance throughout 9M19 was also attributed to higher energy and raw material costs (mainly steel).

• APM’s only redeeming feat throughout 9M19 was the interior & plastics division, recording a 9M19 revenue of RM823.2mil (+31% YoY) and a PBT of RM65.2mil (+61% YoY). The higher sales were largely due to higher demand from certain OEM customers following the supply of new parts for localization content and new model launches since the end of 2018. PBT margin for the division was also higher at 8%.

• No dividends were declared for the quarter as the group typically declares them in its 2Q and 4Q results. APM’s balance sheet remained healthy as the group further strengthened its net cash position to RM271.3mil.

Source: AmInvest Research - 25 Nov 2019