We remain cautious on APM’s outlook, as the combination of weaker demand from OEMs and heightened costs, exacerbated by the negative impact of the Movement Control Order will likely weigh on its medium-term earnings. At 15x 2021E PER, valuation looks demanding, considering the lacklustre performance. Reaffirm SELL.

APM’s Malaysia Plants Resumed Operations

We are comforted that APM is allowed to ramp up its operations to full capacity since 1st week of May-20. This is a positive given that APM, classified as a non-essential service, had halted its production since 18 March, and was subsequently given the approvals to resume operations for the production of auto parts exports since end April-20. Elsewhere, management has also reaffirmed that the supply chain problem is not a major concern since most of the China plants have resumed operations.

Estimate APM’s 2020E Profitability to Decline by 47% Yoy

We estimate APM’s 2020E profitability to decline by 47% yoy, in view of the negative impact of the Movement Control Order (MCO) and softer demand of auto part components from original and replacement (OEM and REM) markets for all its products, and higher production costs (as a result of steel costs and weaker RM vs US$). We believe the global economic slowdown will also worsen the APM’s losses incurred in its overseas operation.

Cash Is King, But 2020 DPS Could be at Risk

Given the Group’s healthy net cash position of RM260.6m as of Dec-19 (or 80% of its market cap), we believe the Group should be able to weather an economic downturn and possibly be able to sustain its dividend pay-out in the coming years. Although its forecast dividend yields of 3-5% (based on 60% payout; on par with sector average of 4.5%) over the next 3 years seems achievable, we do not rule out the possibility of a lower DPS, in tandem with the weaker earnings outlook.

Reaffirm Our SELL Rating With a Higher TP of RM1.40

We cut our 2020-22E earnings forecasts by 3-11% to account for weaker margin assumptions on higher operating costs incurred during the MCO period. Meanwhile, we raise our target price to RM1.40 (from RM1.20), as we roll over the valuation base year to 2021E EPS on an unchanged PE multiple of 12x (16-year average). Faced with multiple headwinds ahead, we think APM’s 2020E earnings could hit an all-time low. At 15x 2021E PER, valuation still looks demanding. Reaffirm SELL.

Source: Affin Hwang Research - 22 May 2020