APM reported a good set of results – 2018 core net profit of RM43.1m (+22.3% yoy) was above our and market expectations, achieving 138% and 137% of the respective full-year estimates. Key variances to our forecasts were a lower-than-expected effective tax rate and higher-than-expected revenue. We raise our 2019-20 core EPS forecasts by 10-12% on higher revenue growth, in view of the higher production volume from key OEM models. However, we expect rising cost pressure and normalisation of tax rates to weigh on APM’s 2019 earnings. Maintain HOLD with a higher price target of RM3.20 (from RM2.90).

2018 earnings growth led by interior & plastic, dragged by suspension

APM’s 2018 core net profit rose by 22.3% yoy, mainly driven by higher contribution from the interior and plastic segment (+57% yoy to RM62m, due to higher demand from Perodua and Mazda) and a 8.1ppt reduction in the effective tax rate to 21.9% (recognition of deferred tax asset on lossmaking units). However, this was partly offset by the weaker contribution from the suspension segment (-56.9% yoy to RM8.8m, dampened by higher steel costs, higher operating costs and lower-margin sales mix). All in, results were above our and market expectations. APM has recommended a final dividend of 7 sen, bringing the 2018 DPS to 12 sen (2017: 13 sen), which is still subject to shareholders’ approval.

Sequentially, Core Net Profit More Than Tripled

APM’s core net profit expanded by more than 3-fold qoq. Besides the lower tax rate mentioned above, 4Q18 saw an increase in revenue (+13.9% qoq), a higher EBITDA margin (+1 ppt to 10% on a favourable margin sales mix). The interior and plastic segment’s contribution was commendable in 4Q18; PBT rose 54.6% qoq to RM21.6m, likely driven by the higher seats demand for Perodua Myvi and the all-new Perodua Aruz.

Raising 2019-20 EPS Forecasts by 10-12%; Maintain HOLD

We have raised our 2019-20 EPS forecasts by 10-12% after incorporating higher revenue growth, and our TP to RM3.20 (from RM2.90) based on an unchanged 2019E PER of 19x (+1SD of 5-year mean forward PE). We also introduce out 2021 forecasts. While we like the Group’s leading role as a regional autoparts manufacturer and solid net cash position of RM284m as at Dec 2018, we believe the higher operating cost environment, in particular the higher steel costs, will pressure the 2019 profit margin. As such, we maintain our HOLD rating.

Source: Affin Hwang Research - 26 Feb 2019