APM registered one of its weakest quarters with core earnings declining 74% yoy to RM3.4m in 2Q17. This brought 1H17 core net profit to RM13.9m (-47% yoy), which missed our and consensus estimates. The main culprit were the high operating costs at its newly completed plant as well as a higher effective tax rate as some APM subsidiaries reported a loss for which no deferred tax asset was recognised. We lower our FY17-19E earnings by 23-44%. Maintain SELL with lower TP of RM3.00.

Sharp Decline in 2Q17 Earnings

APM reported a 2Q17 headline profit of RM2.5m (-76.2% qoq, -60.6% yoy) bringing 1H17 figure to RM13.1m, which represents a 16.9% yoy decline. After excluding various one-offs, cumulative 1H17 core net profit stood at RM13.9m (-47% yoy), accounting for 22% and 23% of our and consensus estimates, respectively. 1H17 revenue came in at RM569.6m (-2% yoy) as the suspension, interior & plastics and electrical & heat exchange segments posted yoy declines. The lower operating margin (-1.3ppt) and a higher effective tax rate resulted in a lower overall core net profit which declined 47% yoy.

Segmental Analysis

Revenue for the suspension segment declined from RM55.7m in 2Q16 to RM47.8m in 2Q17 affected by lower off-take from the OEMs, as certain models reached the tail end of their lifespan, while the interior & plastics segment revenue fell by 11% yoy to RM178.4m, on lower demand for OEM parts as a result of the production shutdown following the festive season in July 2017. Lastly, revenue for the electrical & heat exchange segment was down by 12.2% yoy to RM33.7m due to lower sales activities and demand.

SELL on APM With Lower 12-month TP of RM3.00

Post the disappointing results, we slash our FY17-19 earnings forecasts by 23-44% mainly to factor in the compression in margins across all business segments. We lower our target price to RM3.00 (from RM3.55) based on unchanged 11x PER on 2018E (previously 2017E). Maintain SELL. Key upside risks to our call include a rebound in consumer sentiment and spending which may lead to a strong pick-up in vehicle sales.

Source: Affin Hwang Research - 22 Aug 2017