APM’s 1Q15 earnings disappointed, reaching just 19% and 16.8% of our previous estimates an consensus forecasts respectively. We maintain our MYR4.30 TP (17% downside) but downgrade the stock to SELL (from Neutral). Profits were squeezed by a stronger USD and pricing pressure, on top of a higher effective tax rate. Growth prospects going forward look unexciting.

• 1Q15 earnings disappoint. APM Automotive’s (APM) 1Q15 earnings were below expectations, with net profit of MYR17.8m (-27.8% QoQ, -29.8% YoY) reaching just 19% and 16.8% of our previous estimates and consensus forecasts respectively. Revenue of MYR318.3m was in line with expectations, helped by higher total industry production (TIP) during the quarter (see Figure 3). The divergence was attributed to weaker margins and a higher effective tax rate. No dividends were declared.
• Margin squeeze. 1Q15 EBIT margin fell to 9.9% from 11.1% in 1Q14 and 11.7% in 4Q14, due to a stronger USD that raised MYRdenominated costs as well as pricing pressure from original equipment manufacturer (OEM) customers. Note that APM recognised a MYR6.2m revaluation gain on investment properties in 4Q14. The higher revenues were generated by its interior & plastics and electrical & heat exchange divisions. Marketing revenue declined due to lower exports to Russia. The effective tax rate for the quarter spiked to 36.5% (2014: 23.5%) from higher deferred tax charges.
• Forecasts and risks. We trim our 2015-17 earnings estimates by 5.7%, 4.8% and 4.7% respectively after tweaking our margin assumptions. We expect the ongoing pressure on volumes and pricing to persist through 2015. Risks include higher industry sales and production volumes, new domestic OEM supply contracts and a weaker USD.
• Downgrade to SELL (from Neutral). Our MYR4.30 TP is unchanged after rolling over our base year to 2016 and applying an unchanged target P/E of 9x, in line with historical multiples and peer valuations. The stock currently trades at an implied yield of 3.9% after trimming our DPS estimate to 20 sen (44.3% payout). We expect domestic total industry volume (TIV) to remain lacklustre this year and the continued focus on costs by OEMs will mean continued pricing pressure on component suppliers. In our opinion, valuations are stretched with a forward P/E of 10.8x and 2014-2017 net profit CAGR of -0.6%. Downgrade to SELL.