APM’s  1Q14  results  were  slightly  below  expectations  due  mainly  to margin  compression  from  higher  raw  material  costs  and  pricing pressure  despite  continued  efforts  to  grow  sales  of  component modules.  APM’s  current  business  strategy  will  likely  yield  modest organic earnings growth going forward unless it utilises its MYR318m cash hoard more aggressively. Maintain NEUTRAL and MYR5.80 FV.

• Slightly below expectations.  APM Automotive (APM)’s 1Q14 earnings were  below  our  and  consensus  estimates.  Net  profit  for  the  quarter  of MYR25.4m  (+1.7%  q-o-q,  -9.7%  y-o-y)  reached  only  20.3%  of  our previous 2014 estimate and just 19.1% of consensus. Revenue was flat sequentially but rose 8% y-o-y on the back of a 5% rise in total industry production (TIP). Higher revenue came from increased y-o-y sales of all three  major  product  categories  of  suspension,  interior  &  plastics  and electrical & heat exchange. Marketing revenue  declined 5.4% y-o-y due to lower export sales while overseas revenue continued to gain traction.
• Margin  compression.  EBIT  margin  for  the  quarter  fell  to  11.1%  from 12.0% in 4Q13 and 12.8% in 1Q13. Segmentally,  the main culprit was interior & plastics with segment profit down 14% q -o-q and 11.2% y-o-y due to adjusted competitive pricing for  original equipment manufacturer (OEM)’s customers.
• Risks.  These  include  slower  consumer  discretionary  spending  on  bigticket  items  like  cars  as  a  result  of  higher  living  costs.  Potential  car buyers’  reaction to the impact of the upcoming implementation of  goods and services tax (GST) is also difficult to predict.
•  Forecasts. After cutting our margin assumptions, we lower our 2014 and 2015 estimates by 5.4% for both years.
• Investment  case.  It  is  still  premature  to  declare  the  new  National Automotive Policy an unqualified success as the Ministry of  International Trade and Industry (MITI)  has only awarded one energy efficient vehicle (EEV) manufacturing license.  APM’s current growth trajectory will likely be modest given the  mature domestic market and limited export volume growth in the next few years unless it puts its MYR318m  cash hoard to better use. FV of MYR5.80 is unchanged after rolling forward our base year to 2015 on a 9x target P/E (unchanged).

Source: RHB