Investment Highlights

• We maintain a HOLD on APM with a lower fair value of RM3.20/share. This is based on lower projected earnings pegged to an unchanged FY18F PE of 11x – two notches below its three-year average historical forward PE of 12.7x. We cut our FY17F-FY19 EPS projections by 9-26% following a dismal 1H17 showing.

• The group's net profit for the YTD period fell 17% YoY to RM13mil. We summarise the key factors that affected its earnings in this period:
  1. Lower production from the local sector. Total industry production (TIP) in 1H17 slipped 3% YoY and group revenue fell by 2%. Proton and Perodua, which together account for 50-60% of APM's revenue, saw sales slipped 10% YoY and 2% YoY respectively. APM highlighted that this was contributed by a lower demand from the OEM side as certain models had reached the end of their life cycle in 2016 and the shorter working days in 2Q17 (due to festivities).
  2. Higher operating costs. Expenses from new overseas factories (including those in Thailand and Indonesia) took their toll, more visibly in 2Q17 when the group’s operating margin fell 2.2ppts to new low of 3.7%. Higher depreciation and staff costs in certain overseas operations continued to mitigate top-line improvement. This was evidenced by the higher losses in Indonesia (YTD loss before tax up 79%YoY to RM5mil) and other overseas markets (YTD PBT for "all other segments" — comprising Thailand, Vietnam, Australia, the US, the Netherlands and Myanmar — declined 61% YoY to RM2mil) despite both segments recording commendable top-line growth.
• Overall, the impact of an exceptionally weak second quarter (revenue -10% YoY, net profit -61% YoY) was partially cushioned by a stronger first quarter (revenue +6% YoY, net profit +13% YoY). This has prevented the group's YTD profit from falling even more drastically.

• The group declared a dividend of 4.5 sen/share. This is lower than the 5.0 sen/share paid in the first half of last year. Dividend payout ratio for 1H17 is higher at 67% vs. 62% in 1H16. The group maintained its net cash position (of RM163mil) as of end-June. We believe the group will continue its trajectory of high capex towards reaching its revenue target of RM2bil per annum by 2020. On average, it has spent 8% of its annual revenue (about RM98mil/year) on acquisitions and expansion.

• The group could see some respite from an improvement in local production in the second half (i.e. a new Perodua Myvi anticipated by year-end; Perodua is estimated to account for up to 40% of the group's revenue) although the problem of high costs (especially in overseas factories still in their early days) will persist.

• We reiterate the catalysts for an upgrade on APM are: (i) a valuepositive M&A by way of stronger earnings and a manageable cost; (ii) a significant improvement in local TIV; and (iii) the opening of new areas of business, such as the application IoT technology.

Source: AmInvest Research - 22 Aug 2017