APM Automotive - JV with global Tier 1 supplier BUY

kiasutrader

Publish date: Thu, 31 Jan 2013, 10:36 AM

- We maintain our BUY call on APM, with an unchanged fair value of RM6.50/share. It was announced yesterday that APM has entered into a JV with Tachi-S (Thailand) Co Ltd to develop, manufacture and sell automotive seats for OEMs in Malaysia.

- Tachi-S (Thailand) is a global supplier and manufacturer of automotive seating systems with key customers being Nissan, Toyota, Honda and Mitsubishi. The group is a unit of Tokyo-listed Tachi-S, in charge of overseeing the larger group's operations in India and ASEAN.

- A total initial investment of RM3.5mil will be put in, with APM taking a 60% stake in the venture while Tachi-S will control the remaining stake. The JV will likely be focused on marketing, sales and R&D while the manufacturing of products will be via APM's existing plants. APM's portion of investment (of RM2.1mil) will be funded by internallygenerated funds.

- While APM already manufactures and supplies seats to OEMs in Malaysia, it is doing so as a Tier 2 supplier. By partnering with Tachi-S (which is a Tier 1 supplier), APM would have access to detailed design drawing and technical blueprints from Japan.

- The move should pave the way for a deeper localisation for future Nissan models. In fact, the much deeper localisation for the Almera (50% localisation rate vs. typical 30-40% localisation for existing Nissan models) was partly a result of deeper technical partnership with Tachi-S prior to this official JV being set up.

- No changes to our projections at this juncture, as contributions from the JV (in the form of increasing revenue per car set) will only gradually be reflected as and when new CKD Nissan models are rolled out. The higher revenue contribution also comes with higher MI leakage as APM only owns 60% of the JV.

- Nonetheless, we are overall positive on the move as it structurally lifts APM's positioning within the OEM parts supply space - having established a strong partnership with a global Tier-1 supplier. The move follows APM's JV with Tier-1 European supplier, IAC (International Automotive Components) back in 2011.

- A key near-term catalyst for APM is a step-up in dividends (usually announced in 4Q results). We project FY12F GDPS to rise to 40 sen/share (7% yield) and FY13F to 50 sen/share (9% yield). APM's huge un-utilised cash pile of RM380mil net cash (or RM1.88/share, accounts for 35% of market cap) and past 5 years' average annual FCF of RM82mil (RM0.41/share) should easily support the dividend payout.

Source: AmeSecurities

APM (5015)

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