• APM Automotive (APM) posted a core net loss of RM20m in 2Q20 (vs core net profit of RM11m in 2Q19) - largely due to the severe impact from the MCO
• 6M20 results were below expectation – 6M20 core net loss of RM24m (vs 6M19 core net profit: RM19m)
• We cut 2020-22E earnings estimates by 5-51% to account for the weaker 6M20 results and weaker EBITDA margins. Maintain HOLD with a lower TP of RM1.50

Sequentially Weaker Due to MCO

Sequentially, APM’s 2Q20 revenue fell by 46% qoq to RM152m, its lowest quarterly revenue in our record, as business operations were suspended during the Movement Control Order (MCO). The weaker sales were not able to offset the fixed overheads, leading to wider core net losses of RM20m (vs 1Q19 core net loss of RM4m).

6M20 Core Net Loss of RM24m, Below Expectation

On a cumulative basis, APM reported a 6M20 core net loss of RM24m (vs 6M19 core net profit of RM19m) due to above-mentioned reasons. Overall, earnings fell below our expectations, due to the weaker-than-expected 6M20 EBITDA margins of 2.1% (vs 6M19 EBITDA margin: 8.9%). No dividend was declared for 2Q20.

Gradual improvement in 2H20, austerity measures to keep cost under control

Moving into 2H20, gradual improvement should follow, in our view, as the Group ramps up production to cater for higher demand for cars, following cheaper car prices on the sales and service tax exemption. Although we expect revenue to improve in 2H20, we believe 2H20 margins may be squeezed by higher raw material costs – hot rolled steel prices rose by 10% mom to US$584/tonne in early Aug 2020. We gather that the Group’s focus will be to undertake strict austerity measures which, among others, include deferring capital expenditure, salary reduction, hiring freeze and cost rationalisation efforts.

Maintain HOLD With Lower TP of RM1.50

We cut our 2020E EPS by 51% to account for the weaker 6M20 earnings and also cut 2021-22E EPS by 5-12% to reflect weaker EBITDA margins on higher raw material prices. Post earnings cut, we lower our TP to RM1.50 (from RM1.70), based on an unchanged 17x 2021E PER (-1SD its 6-year mean forward PER). The Group’s solid 2Q20 net cash position of RM301m (or RM1.54/share) should support APM’s share price, we believe. Key upside/downside risks to our call on APM: (i) higher-/lower-thanexpected vehicle production volume, ii) higher-/lower-than-expected export sales, (iii) an increase/decline in commodity prices, and (iv) fluctuation of Ringgit (vs US$)

Source: Affin Hwang Research - 21 Aug 2020