Investment Highlights

• We upgrade APM Automotive to HOLD and its FV to RM3.19/share (from a SELL and FV of RM3). We have rolled forward our valuation to FY19F while keeping to a PE of 11x.

• We have raised our FY18-20 projections by 11% after APM’s 1Q18 outperformed expectations: net profit for the quarter accounted for 31% of our FY projection and consensus.

• 1Q18 core net profit of RM15.4mil was 13% higher YoY and we draw this to two main factors — more business from Perodua as production for the new Myvi ramped up and higher exports to Europe, which raised the sales for APM’s top two segments respectively (interior & plastics and marketing).

• On the other hand, APM was hit by three main factors — the stronger ringgit during the quarter (affecting trades in USD and AUD), high steel and natural gas prices, the discontinuation of two major models from an unnamed OEM customer and the continuing losses from Indonesia.

• Its core net profit margin was flat on a YoY basis, reflecting the mixed results across its many divisions.

• While orders from Perodua could see APM recording at least one more strong quarter, we caution that the group’s overall performance is still tied to a lethargic local market (up to two-thirds of its topline has been anchored to the two domestic carmakers) and ongoing efforts to optimize certain overseas operations.

• Our projections imply a rebound after seeing net profit decline for four consecutive years. Car sales have fallen for two years, and production TIV took a harder hit last year (slipping 8% YoY and accounting for only 87% of FY sales) as companies slowed on production to focus on existing stocks.

• 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 of IoT.

Source: AmInvest Research - 17 May 2018