Investment Highlights

• We are maintaining our SELL recommendation on APM Automotive an unchanged FV of RM1.68 based on a FY20F PE of 10x.

• APM’s FY19 core net profit of RM31.2mil was in line with our expectations, accounting for 102% and 97% of our and consensus forecasts respectively. Cumulative core earnings fell 19% YoY due to poorer performances from six of the group’s major operating segments.

• APM’s weaker FY19 earnings was contributed by depressed profit margins on all levels YoY. This has ultimately led the group recording a weaker core net profit margin of 2.1% in FY19, compared to 2.9% in FY18.

• Losses for APM’s Indonesia operations widened to RM23.5mil in FY19 (+104% YoY) compared to an LBT of RM11.5mil in FY18. This was due to the rising costs of raw materials, lower production volumes and higher operating costs. Besides that, the group’s associates in Indonesia were also negatively impacted by declined sales, expenses from restructuring exercises and higher operating expenses. This resulted in a massive slid in associates contributions to – RM9.1mil for the year.

• APM’s suspension division sank into the red in 4Q19 with an LBT of RM1.4mil. Overall in FY19, the division recorded a 9M19 total LBT of RM1.1mil (-113% YoY) compared to a PBT of RM8.8mil in FY18, attributed to an unfavourable product mix and lower production volume. The division’s deteriorated performance throughout FY19 was also attributed to higher energy and raw material costs (mainly natural gas).

• APM’s only saving grace throughout FY19 was the interior & plastics division, recording an FY19 revenue of RM1.1bil (+23% YoY) and a PBT of RM90.7mil (+46% 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 and second half of 2019. We noticed that PBT margin for the division was also higher at 8% in FY19.

• A dividend of 5.0 sen was declared in the quarter, totalling FY19’s dividend to 10.0 sen. This translates into an FY19 payout ratio of 72% and a fair dividend yield of 4.7%. APM’s balance sheet remained healthy as the group stands on a net cash position of RM108.1mil.

Source: AmInvest Research - 24 Feb 2020