- We maintain our BUY call on APM at an unchanged fair value of RM5.60/share (pegged at 9x FY15F EPS). APM registered RM19mil core net profit in 4Q14, which brought FY14F core earnings to RM102mil. This is weaker than expected, accounting for 92% of our forecast but in line with consensus at 104% of full-year estimate.

- Earnings were down 8% in FY14 (revenue: -3%) due to lower OEM offtake and margin squeeze, while for the most part of 2H14, APM was impacted by industry de-stocking. Proton’s Iriz (in which APM is a big supplier), also faced production hiccups after its launch in Sep 2014.

- Our forecasts are maintained as the halt in Iriz production is an exceptional factor in 4Q14 and the model has now resumed production. APM is also a beneficiary of the Axia, though incremental volume from Perodua in 4Q14 was offset by the weakness in Proton’s volume. Revenue per car for the Iriz is much higher compared to the Axia, where APM only supplies interior products.

- Our expectation of a comeback in national car market share in FY15F bodes well for APM given the high concentration of revenue it has on these clients, notwithstanding growing contribution from Mazda and Honda in the non-national segment (driven by aggressive localisation programs).

- APM is making a big push to diversify away from the domestic market, targeting to grow overseas contribution to 20% of revenue in the mid-term from just 6% currently. Already, overseas revenue had grown 89% in FY14, boosted by the acquisition of McConnells’ parts business in Australia (bought for effectively 2x PE) in 3Q14.

- The strategy is to expand McConnells’ market in South East Asia (beyond only Australia currently) and to ride on the margin premium that the brand commands (30%-40% pre-tax margins vs. existing single digit margins at APM). Production will be gradually transplanted into APM’s cheaper ASEAN bases (in Malaysia and Vietnam) to create cost competitiveness.

- Beyond this, APM sees potential in the more lucrative markets such as the US. Access to the North American auto supply chain opens up APM’s potential to a 19mil- 20mil/annum auto market (accounting for 27% share of global production) vs. ASEAN’s 4mil/annum volumes.

- APM announced dividends of 19.5sen for FY14, representing a payout of 36% (vs. 72% in FY13, which included special dividends). Nonetheless, sustainable dividend payout is expected to rise to 50% payout ratio, which could translate into attractive 6.2%-7.2% dividend yield over FY15F-17F.

Source: AmeSecurities