Investment Highlights

• We maintain a HOLD on APM Automotive but cut our FV to RM3.10/share (from RM3.19) based on an unchanged FY19F PE of 11x. We trim our FY18-20 projections by 3-7% to account for weaker sales and higher operating cost.

• 1H18 core net profit of RM18mil fell below expectations. While the second quarter is notably weaker for the group, 1H18 met 33% of our FY expectation vs. the 40% last seen for the period. TIP in 1HFY18 was 10% higher, driven by a peak in production for the Perodua Myvi in the first quarter.

• Revenue grew 8% YoY on double-digit YoY growth for its three key segments though some of the gain was pared by a drop in sales for the electrical & heat exchange segment, as deliveries to two major customers were reduced on the end of a product lifecycle in Oct 2017. However, the segment benefited from a stronger PBT margin (up 5ppts to 6%) due to higher efficiency and price revisions this year.

• PBT for 1H18 expanded 35% YoY, anchored to a better performance by the interior & plastics segment and marketing segment. The latter benefited from higher sales (in both exports and local REM sales) and PBT margin was consistent.

• 2Q18 saw revenue improve 7% YoY while PBT dip 1% YoY. Interior & plastics, which remained the most important segment and accounted for nearly half of revenue, saw a higher revenue and PBT on the introduction of a new car model and higher demand from OEM customers.

• However, PBT dipped slightly as margins fell on higher material costs and the effect of a stronger ringgit on its suspension segment. APM said planned shutdowns in the plants of several OEM customers also led to lower sales during the quarter.

• Interior & plastics along with marketing, which make up two of its most important segments, saw their margins slipped on a sequential basis. The suspension segment saw a lower average export price due to a stronger ringgit against the USD, and most of its sales of leaf spring products were denominated in USD.

• APM declared a first dividend of 5 sen/share, taking its 1HFY18 payout to 55% vs. 67% in the previous period. We have input a payout assumption of 60% for the coming years based on its historical 3-year average of 63%.

• We reiterate the catalysts for an upgrade 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 business, such as the application of IoT.

Source: AmInvest Research - 30 Aug 2018