APM Automotive (APM) 2017 core net profit fell 39.7% yoy to RM35.2m which was within our but missed consensus expectations. The earnings decline was due to weaker revenue (-4% yoy) and lower EBITDA margin (-1ppt to 10.3%), arising from unfavourable product mix, higher imported raw material costs and higher overhead costs. APM recommended a final dividend of 8.5sen, translating to a total DPS of 13sen for 2017 (2016: 15sen). Notwithstanding the lacklustre earnings, APM’s high cash pile of RM275m (equilavent to 40% of market cap) and dividend yield of 4% should support share price. Maintain HOLD.

2017 Came in Within Expectations

Excluding the non-recurring items of RM5.7m (largely arising from fair value gain on investment properties), APM’s FY17 core net profit fell 39.7% yoy to RM35.2m, within our forecasts but 10% below consensus expectations. Revenue fell 3.9% due to lower demand for the suspension division (-6.0% yoy), interior & plastic division (-4.7% yoy) and electrical & heat exchange division (-15.4% yoy). APM’s FY17 EBITDA margins dipped 1ppt to 10.3%, as a result of (i) higher operating costs due to the depreciation of the RM vs. US$ (which increased imported raw material costs), (ii) lower plant utilisation leading to higher production overhead cost, (iii) high preoperating cost for the newly set up manufacturing plant in Thailand.

Sequentially, Core Earnings Dropped 47.1%

Sequentially, the group’s core pretax profit fell by 24% qoq to RM16.1m due to losses from its overseas segment (RM2.9m loss in 4Q17, from RM0.5m profit in 3Q17), arising from higher operating costs resulting from the completion of a plant in Thailand.

Minor Earnings Tweak, Maintain HOLD

We adjust our 2018-19E EPS by -2% to -3% after incorporating APM’s full year financial statement. In tandem, we trimmed our 12 month target price to RM3.84 (from RM3.96) based on an unchanged 14x 2018E PER. Maintain HOLD. We expect APM’s earnings to recover in 2018 on margin improvements driven by a stronger Ringgit and higher plant utilisation. The group’s high net cash of RM275m and 4% dividend yield should support share price. Key risks include: (i) higher/lower vehicle sales and (ii) a sharp spike/ plunge in commodity prices (i.e., aluminium and steel). This note marks a transfer of analyst coverage.

Source: Affin Hwang Research - 1 Mar 2018