APM’s 1Q19 core net profit dropped by 48% yoy to RM8m, accounting for 24% and 21% of our and the street’s full-year forecasts respectively. The earnings decline was due to weaker performance across most segments (exc. Interior & Plastic). We expect the ongoing headwinds (ie. higher steel and energy costs) to persist in the coming quarters. In tandem, we cut our 12-month target price to RM2.80 on a lower target PER of 16x and roll forward our valuation horizon to 2020E. Maintain HOLD.

1Q19 Earnings Declined by 48% Yoy

Despite the 14.8% yoy increase in revenue, 1Q19 core net profit fell by 48% yoy due to weaker performance from most divisions (exc. Interior & Plastic, +30% yoy). The higher operating cost environment as well as lower export sales (of higher-margin products) caused the suspension division to go into the red for the first time since 3Q13. The overseas operation’s 1Q19 LBT of RM5.4m (1Q18 PBT: RM0.6m) was due to weaker contribution from the Indonesia, US, Myanmar and Australia operations. In addition, 1Q19 PBT of the electrical & heat exchange division and marketing division dropped by 89% yoy and 30% yoy respectively, in tandem with the reduced sales.

Sequentially Lower on High Base Effect and Seasonal Factors

APM’s 1Q19 core net profit fell by 86% qoq as most divisions performed well in 4Q18 (exc. overseas operations). We note that 1Q is seasonally weaker given the shorter production period due to the festive season. The earnings momentum for the interior & plastic division (1Q19 PBT of RM24m, +11% qoq) continued to be strong but other divisions weighed on the overall 1Q19 earnings.

Maintain HOLD With Lower TP of RM2.80

While we like the Group’s leading role as a regional autoparts manufacturer and solid net cash position of RM284m as at Mar 19, we believe the higher operating cost environment, in particular higher steel costs, will pressure profit margins. We leave our earnings forecasts unchanged, but apply a lower target PE of 16x (-1SD to its 5-year mean PE from 19x previously), on our 2020E EPS (rolled forward from 2019E) to derive a lower 12-month TP of RM2.80. We maintain our HOLD rating on APM. 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 - 27 May 2019