APM reported a decent set of results – 6M19 core net profit grew 11% yoy on higher revenue (+18% yoy), partly offset by higher interest expense and weaker EBITDA margins. However, headline net profit was marginally weaker by 3.0% yoy. All in, the results were within street but above our expectations due to a lower-than-expected effective tax rate. We raise 2019-21E EPS by 13%-16% to reflect the lower tax rate. Maintain HOLD rating on APM with a lower price target of RM2.40 (from RM2.80), pegging APM at lower P/E multiple of 12x on 2020E EPS, in-line with the small-cap auto peer average. The outlook in 2H19 remains challenging amidst rising operational costs and weak export sales.

6M19 Earnings Grew by 11% Yoy

APM’s 6M19 core net profit rose by 11% yoy, driven by higher revenue (+18% yoy) and a lower effective tax rate. However, this was partly offset by higher interest expense and a -1.5ppt reduction in EBITDA margins to 10.4% due to lower export sales (of higher margin mix) and continued losses from the suspension segment (LBT of RM0.5m, on higher material prices). Operationally, the results were in-line with our expectations – 6M19 pretax profit accounts for 49% of our full year forecast. However, its core net profit was above our expectations due to a lower-than-expected effective tax rate of 24% (vs our 2019E forecast of 32%). Despite a higher 6M19 net profit, management maintained its dividend payout of 5 sen.

Qoq, Headline Net Profit Declined 12.5% on Forex Loss and Provision

Its 2Q19 headline net profit was however lower at RM8.6m (-12.5% qoq) due to a RM1.46m net forex loss and a RM1.1m provision for slow moving stock. Nonetheless, 2Q19 underlying net profit grew by 41% qoq on lower operational losses overseas and higher associate earnings.

Maintain HOLD With a Lower TP of RM2.40 (from RM2.80)

We raise our 2019-21E EPS by 13%-16% after incorporating a lower tax rate of 25% (previous forecast of 32%). Notwithstanding the decent 6M19 results, we think APM’s business outlook remains challenging, in view of the rising operating cost (ie higher steel cost) and weak export sales. We now peg APM at a lower P/E target of 12x on 2020E EPS, in-line with the small-cap auto peer average (from 16x), representing a -1SD to APM’s 5- year average P/E multiple. At current price, FY19E-21E dividend yields look attractive at 4.8-5.0%. Key upside / downside risks: (i) higher/lower vehicle production, and (ii) sharp plunge/spike in commodity prices (ie. aluminium and steel).

Source: Affin Hwang Research - 28 Aug 2019