Investment Highlights

• We cut APM to a SELL and lower our FV to RM3.00/share. Our FV is pegged to an unchanged FY18 PE of 11x — two notches below its three-year average historical forward PE of 12.7x.

• APM's net profit of RM26mil for its 9MFY17 met 60% of our FY estimate and 70% of consensus'. We reduce our FY17- FY19 projections by 9-13%.

• The group's 9MFY17 net profit was lower by 22% YoY due to lower demand from its OEM clients, high input costs caused by a weak ringgit and high fixed costs.

• 9M17 total industry production (TIP) was 1% lower YoY. Perodua production was flat while Proton's improved 8% YoY due to the low base; the two contribute about 40% and 20% of group revenue respectively.

• Demand fell for key products such as vehicle seats, coil springs and shock absorbers. Subsequently, revenue from two important divisions (interior & plastics, suspension) dropped sharply.

• The marketing division continues to be a bright spot. The 17% YoY improvement in PBT was driven by aggressive promotions, launch of new products for the local replacement equipment market, and strong exports to Europe and Thailand.

• Foreign operations (under "all other segments") saw flat revenue with nearly half coming from Australia (the unit sells bus and train seats). However, the cost from relocating the Australian operation and high start-up costs in Thailand slashed the division's PBT by half.

• APM's overall performance continues to be dragged by an inertia of the local market and ongoing efforts to optimize certain parts of its overseas operations. It is still largely anchored to Malaysia with foreign operations contributing 8% of top and bottomlines.

• It has spent substantially on expansion and M&A towards reaching a revenue target of RM2bil by 2020 and reducing its dependence on OEMs (to 50% by then from 70% now). While its interest cost and gearing are manageable currently, we emphasize that this could change if a major acquisition takes place.

• We reiterate the catalysts for an upgrade on APM are: (i) a value-positive 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 - 21 Nov 2017