APM reported a weaker set of results – 9M19 core net profit fell by 5% yoy to RM23m, coming in below our and market expectations. The weaker set of earnings was mainly due to a weaker 3Q19 (affected by its associate losses), while for 9M19, the group also saw higher operating expenses eating into its margin. We cut FY19-21E core EPS forecasts by 16-26%, in view of the lacklustre performance of the Indonesia operations. In the medium term, high operating costs will continue to weigh on APM’s earnings. Maintain HOLD with a lower TP of RM1.95 (from RM2.40). At 13x 2020E PER, valuations look fair.

Sequentially Lower on Losses From Indonesia Associate

Sequentially, APM’s 3Q19 core net profit fell by 71% qoq to RM3m, dampened by losses from its Indonesian associate company (12.5%- owned P.T. Adient Automotive Indonesia), which recorded losses of RM5.1m in 3Q19 (vs. 2Q19: RM0.9m). This was due to: i) higher operating costs, ii) restructuring exercises (ie, staff retrenchment and expensing-off initial engineering and development costs), and iii) provision of stock obsolescence.

9M19 Core Net Profit Was Lower by 5% Yoy; Below Expectations

Meanwhile, APM’s 9M19 core net profit declined by 5% yoy to RM22.6m, undermined by the above-mentioned associate losses and higher operating expenses (which were also reflected in 9M19 EBITDA margin erosion of 0.9ppts). On a segmental basis, the Interior and Plastics division was the best performer in 9M19: pretax profit rose by 61% to RM65m on higher demand from key OEM customers. On the contrary, other businesses remained weak – suspension (-97% yoy), electrical & heat exchange (-46% yoy) and marketing (-45% yoy) respectively. Overall, results were below our and market expectations, accounting for 57-58% of street and our full-year forecasts (before revisions).

Maintain HOLD With a Lower TP of RM1.95 (from RM2.40)

We cut our 2019-21E EPS forecasts by 16-26%, mainly to factor in the losses from its Indonesian associate and weaker margins assumptions. Notwithstanding its lacklustre earnings outlook, APM’s solid 3Q19 net cash position of RM279m augurs well for earnings-accretive M&A. All in, we lower our TP to RM1.95 (from RM2.40) based on an unchanged PER target of 12x on 2020E EPS (-1SD to APM’s 5-year average PER multiple). Reaffirm HOLD. 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 - 25 Nov 2019