- We maintain our BUY call on APM and raise our fair value to RM7.40/share (from RM7.20/share previously). APM has acquired from McConnell Seats Australia Pty Ltd its public sector mass transit seating manufacturing business known as “McConnell Seats Australia”.

- The purchase was for specific assets, intellectual property, designs, brand, and goodwill associated with McConnell’s seat manufacturing business for AUD4.7mil (RM14mil), which will be funded internally.

- We understand the business generated circa RM7mil/annum earnings, implying the acquisition was executed at just 2x PE. The incremental earnings are estimated to enhance APM’s FY14F/FY15F EPS by 2.4%/4.4% and we have correspondingly adjusted our numbers upwards.

- We are positive on the acquisition for several key reasons:

- (1) Margin expansion leveraging on McConnell’s brand premium and pricing power (having been around for 62 years in the Australian seat manufacturing business). McConnell generates gross margins of 40% vs. APM’s overall gross margins of 30%.

- (2) Access to a new clientele base in the form of key commercial vehicle manufacturers such as Bombardier and Scania. APM generates RM100mil in export sales and targets to expand this to over RM300mil post acquisition via McConnell’s premium pricing and cross-selling of existing APM products (such as suspension) under the McConnell’s brand.

- (3) Take advantage of the hollowing out of the Australian auto sector by FY17F by acquiring assets in the supply chain at cheap valuation. APM has the advantage of being a big regional player in ASEAN and is likely to cross sell the McConnell brand and products into existing markets, and leverage on its lower cost manufacturing base in the region in Vietnam, Indonesia, and Malaysia once auto manufacturers exit Australia within the next 2-3 years.

- Our forecasts have yet to factor in earnings enhancement from the potential expansion of the McConnell brand and products into APM’s existing markets. If APM is successful in meeting its post-acquisition incremental RM300mil revenue target, we estimate the impact on APM’s earnings could be well over 30%.

- The acquisition accounts for just 5% of APM’s solid net cash position of RM318mil. We like APM for this, on top of its positioning to capitalise on volume growth driven by developing green car programs in Malaysia and Indonesia. Its dividend yield of 5% provides a good cushion for share price, while valuation of 8x is undemanding in relative to the sector PE of 11x.

Source: AmeSecurities