Investment Highlights

• We maintain a SELL and FV of RM3.00/share on APM. 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 saw its FY17 revenue drop 4% YoY and net profit fall 20% YoY. This is the fifth year the group saw net profit decline. The net profit of RM39mil was within our expectation.

• The drop in revenue came as two out of its three biggest segments saw a lower topline: the interior & plastics segment saw revenue drop 5% YoY on lower demand from OEMs as some car models came to the end of their life cycles, the suspension segment saw revenue slip 1% YoY as the group worked to raise export sales for leaf spring products, and the marketing segment rose 14% YoY from aggressive promotions, the launch of new products for the local REM market and stronger exports.

• The lower OEM orders were reflected in the 8% drop in production TIV for the year to 499.6K units. This was the third consecutive annual decline.

• On PBT level, it was similarly a mixed bag: interior & plastics saw PBT increase 10% YoY due mainly to an inventory variance adjustment, marketing climbed 14% YoY on the higher sales, and suspension fell 6% YoY as it was hit by higher steel prices and production for shock absorbers and coil springer plants fell short amid having to bear fixed overhead costs.

• The net profit drop of 20% YoY came on the weaker topline, smaller margins (EBIT margin was cut 0.8ppt to 5.6%) as the weaker ringgit raised the prices of raw materials, lower OEM orders amid fixed overhead costs, and the cost of setting up a new plant in Thailand.

• 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.

• 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.

Source: AmInvest Research - 1 Mar 2018