APM’s 9M18 core net profit fell by 14% yoy to RM23.9m, below market and our expectations (55% and 65% of respective full year forecasts). The earnings disappointment was due to losses from overseas operations and weaker-than-expected profit from the suspension segment, affected by higher raw steel prices. We cut our FY18-20E core EPS forecasts by 15-27% to reflect higher material costs / lower profit margin assumptions. We reiterate our HOLD rating on APM with a lower price target of RM2.90.

Lethargic Outlook in Key Segments

APM’s 9M18-core net profit fell by 14% yoy, mainly dragged by the losses from its overseas operations and a 52% PBT decline from the suspension segment, attributable to higher steel costs and lower export sales; we expect these headwinds to persist in the coming quarters. Notwithstanding the stronger 9M18 PBT from electrical & heat exchange division (+143% yoy to RM5.1m), we are lukewarm to its immediate growth prospect due to the lackluster replacement market. We also think that the earnings momentum for the interior & plastic (9M18 PBT of RM40.4m, +54% yoy) and marketing division (9M18 PBT RM9.1m, +19.4% yoy) will likely ease in 4Q18 after the bumper sales in 3Q18 which was fueled by increase in orders during the zero-rated GST period.

Sequential Boost From Tax Holiday Period

APM’s 3Q18 core net profit grew threefold to RM6.4m, driven by higher sales across all key segments, thanks to the above-mentioned tax holiday period. 3Q18 EBITDA margins was marginally higher (+0.7 ppts to 9%), off the 2Q18 low but still below 3/5-year historical averages (10/12%).

Maintain HOLD and Lower TP of RM2.90

We lower our FY18-20E EPS by 15-27% after incorporating higher material cost assumptions (ie. steel, aluminium prices) and weaker contribution from overseas market. Notwithstanding its lacklustre earnings outlook, we are positive on the group’s other prospects: (i) as a leading regional autoparts manufacturer, we think APM may stand a high chance to participate in the supply chain on the proposed third national car project; and (ii) APM’s solid 3Q18 cash position of RM267m augurs well for earnings-accretive M&A. All in, we reiterate HOLD rating with lower price target of RM2.90 based on unchanged 19x 2019E EPS (+1SD of 5-year mean forward PE).

Source: Affin Hwang Research - 19 Nov 2018