APM reported a modest set of results - 1H18 core net profit grew 26% yoy on higher revenue (+8% yoy) as well as higher associate contribution of RM1.1m (vs loss of RM0.7m a year ago). However, 1H18 earnings fell short of our and street expectations due to a higher effective tax rate. Maintain HOLD rating on APM with a higher price target of RM3.70 (from RM3.52).

Pretax profit is inline; core net profit fell short due to high taxation

Operationally, the results are broadly within our expectations – 1H18 pretax profit accounts for 52% of our full year forecast. However, its core net profit fell short of our expectations due to a higher-than-expected effective tax rate of 31% (vs our FY18E forecast of 24%). Elsewhere, APM declared a 5-sen interim dividend for 2Q18 (vs. 4.5-sen in 1H17).

2Q18 Earnings Fell 63% Qoq on Seasonality Factor

Sequentially, APM’s 2Q18 earnings were lower by 63%, tracking a dip in revenue (-8% qoq) due to seasonality factors – OEM customers planned production shutdown for routine maintenance during festive season holiday during 2Q18.

Revenue Improved, But Margins Stayed Still

We believe the stronger 1H18 Total Industry Production volume (TIP) (+10% yoy) increased the sales for APM’s suspension (+24% yoy) and electrical & heat exchange divisions (+10% yoy). APM’s marketing division also grew 10% yoy to RM131m, driven by higher export of leaf spring products to Europe. Elsewhere, margins were flat – the better product margin mix was offset by higher material costs during the quarter.

Maintain HOLD With Higher TP of RM3.70

We cut our FY18-20E EPS by 19%, incorporating a higher tax rate of 32% (from previous forecast of 24%) and higher earnings from associates. We believe APM will see better performance moving forward, benefitting from the Sales and Service Tax (SST) exemptions for auto components, the development of ASEAN car between Malaysia and Indonesia and the upcoming 3rd national car by 2020. As such, we maintain our HOLD call with a higher TP of RM3.70 based on PE of 19x (+1SD of 5-year mean fwd. PE). In addition, APM’s solid 2Q18 cash position of RM282m augurs well for higher dividend payout and earnings-accretive M&A. Key upside/downside risks: (i) higher/lower vehicle sales and (ii) a sharp plunge/spike in commodity prices (ie, aluminium and steel).

Source: Affin Hwang Research - 30 Aug 2018