APM’s 2019 headline profit fell by 29% yoy to RM27m, mainly due to a weaker 3Q19 (impacted by its associate losses), higher interest expense and impairment losses on associate. Excluding the one-offs, APM’s 2019 core net profit of RM32m was above our expectations. With the ongoing Covid-19 outbreak continuing to threaten the automotive supply chain, we expect APM’s near-term earnings to soften further as the Group sources most of its parts and components from China. Therefore, we cut FY20-22E EPS by 8-9%, and lowered the 12-month TP to RM1.80 (from 1.95). Downgrade APM to sell (from hold).

2019 Core Earnings Lower by 25% Yoy

Despite the 12% yoy increase in revenue, APM’s 2019 headline profit was lower by 29% yoy at RM27m, dragged by i) higher interest expenses, ii) losses incurred by its 12.5%-owned PT Adient Automotive Indonesia and iii) one-off impairment loss of RM4.2m. APM indicated that the Indonesia investment had to be impaired down in view of the sustained losses incurred over the recent quarters (Fig 1; caused by lower revenue, higher raw material costs and adverse forex impact of IDR/US$). Excluding the oneoffs, APM’s 2019 core net profit of RM32m (-25% yoy) were above our expectations. APM has recommended a final dividend of 5 sen, bringing the 2019 DPS to 10 sen, the lowest DPS level since 2000.

Sequentially, Core Profit Was Higher on Low Base Effect

Sequentially, APM’s 4Q19 core net profit almost tripled due to the low base effect in 3Q19. Recall, APM’s 3Q19 core profit fell by 71% qoq to RM3m, due to losses at its Indonesian associate of RM5.1m. This was attributable 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.

2019 sales sustained by contribution from Interior and Plastic divisions

On a segmental basis, the Interior and Plastics division was the best performer in 2019: pretax profit rose by 46% to RM91m, on higher demand by key OEM customers. On the other hand, weaker performance was posted by its other segments – suspension’s 2019 LBT of RM1m (vs. 2018 PBT: RM9m was due to unfavourable sales mix and higher production costs), Electrical & Heat exchange (-40% yoy), marketing (-30% yoy, on lower leaf spring to OEMs in Thailand and Australia) and Indonesia operations 2019 LBT of RM23.5m (vs. 2018 PBT: RM52.6m) respectively.

Downgrade to SELL With Lower TP of RM1.80

We cut FY20-22E earnings by 8-9% respectively, as we pencil in further downside to earnings as the disruption in the automotive supply chain remains a major concern. Subsequently we derive a lower 12-month TP of RM1.80 (from RM1.95) at unchanged 12x 2020E PER, in line with the smallcap auto average. The valuation looks pricey at 14x 2020E PER, in view of the bearish earnings outlook. Downgrade to SELL (from hold). Key upside risks: (i) higher vehicle production volume, ii) higher-than-expected export sales, and (iii) a decline in commodity prices (ie. aluminium and steel).

Source: Affin Hwang Research - 24 Feb 2020