- We reaffirm our BUY call on APM following the release of strong 4Q13 results. Our fair value is raised to RM7.20/share (from RM6.40/share previously) as we raise our projections and raise our PE target to 10x from 9x.

- APM’s 4Q13 core earnings came in within expectations. The group reported core earnings of RM25mil for its 4Q13, which brought full-year core earnings to RM125mil. - FY13 operating margins were pretty resilient (FY13: 12.6% vs. FY12: 12.9%) despite Perodua’s vendor cost down initiative. The bulk of margin contraction was seen in FY12 (which was when the cost down initiative began). Prior to FY12, APM’s EBIT margins were >14%.

- Margin pressure from Perodua’s vendor cost down program has likely reached a bottom as we understand that APM has decided to pull out of certain parts development programs with Perodua.

- While revenue from Perodua may contract (we estimate circa 10% drop), APM will more than make up for it via module supplies to new models e.g. Mazda, Subaru and Proton, of which supplies to some of these key customers will likely double.

- More importantly, APM is a key proxy to the potential influx of new capacity via the recently launched EEV program. The doubling in supplies to certain non-national customers is just one example of such benefit. On the back of this potential, we estimate earnings to rise by 17% in FY14F and an 11% CAGR over the next 3 years until FY16F.

- On top of this, APM’s Indonesian unit, which is a Tier-1 supplier to Daihatsu, is likely to see earnings catalysed by Indonesia’s recently launched Low Cost Green Car (LCGC) program, which focuses on making Indonesia a production hub for cheap, fuel efficient minicars. Daihatsu, via its Ayla model, is the first to participate in the program. Around 5mil Indonesian household is expected to be able to afford a car by 2020, more than double the 2010 figure, thanks to the LGCG initiative. APM’s overseas units and exports currently account for 9% of revenue and saw earnings rise 40% in FY13.

- We have raised our target PE for our valuation given potential acquisitive growth on the back of a strong net cash pile of RM294mil. In particular, the vacuum created by the exit of the entire car manufacturing industry in Australia will likely pressure Australian vendors to find alternative volumes or simply exit the business, giving rise to M&A opportunities.

Source: AmeSecurities