APM Automotive (APM) reported relatively flaccid 1H14 earnings. While revenue was broadly in line, margins were decidedly weaker on account of price and cost pressures. Supply of components for the new Proton GSC  and increased localisation efforts by OEMs  could  be key earnings drivers  in  2015.  A  breakthrough  into  overseas  markets  remains  a gradual process. Maintain NEUTRAL and a FV of MYR5.80.

Below expectations,  1H14  earnings disappointed.  Net profit  in 1H14of MYR51.0m declined 18.4% y-o-y and reached  only  43% of our 2014 earnings  estimates.  This  earnings  deviation  was  attributed  to  pricing pressure,  rising  operating  costs  and  higher  start-up  costs  for  a  new original equipment manufacturer (OEM) business. APM declared a lower 7.5 sen interim dividend (1H13: interim 10 sen and special 30 sen, less tax).

Price pressure and rising costs hit margins.  Despite the pressure on competitive  pricing  from  its  OEM  customers,  APM  eked  out  a  3.9% improvement  in  revenue  for  1H14.  This  reflects  the  7.9%  rise  in   total industry  production  for  the  period,  offset  by  weaker  sales  of  Nissan vehicles that declined 17.3% y-o-y during the period. Related party sales to  Tan  Chong  contracted  21%  y-o-y.  APM’s  EBIT  margin  declined  to 10.2% during 2Q14 (2Q13: 13.2%), bringing the cumulative 1H14 margin to 10.7% (1H13: 13.0%). Operating costs that rose include raw materials and  electricity.  Segmentally,  the  suspension  and  electrical  &  heat exchange  divisions  performed  well,  with  improved  export  and replacement demand  and improved earnings from a favourable trading environment and higher localisation. Earnings from the interior & plastics division slumped 22.3% on the back of pricing pressure, start-up  costs and higher component outsourcing costs.

Risks.  Slower consumer discretionary spending on big-ticket items like cars as a result of higher living costs. Potential car buyers’  reaction to the impact of the upcoming implementation of GST is difficult to predict.

NEUTRAL.  We  maintain  our  forecasts  ahead  of  an  analysts’  briefing today.  We  hope  to  obtain  more  colour  on  APM’s  recent  acquisition  of McConnell  Seats,  a  manufacturer  and  designer  of  transport  seating  in Australia for AUD4.7m. Our FV of MYR5.80 is  unchanged, derived from applying a target P/E of 9x to 2015 earnings. NEUTRAL.

Source: RHB