APM’s 1H15 results were below expectations. Lacklustre domestic auto sales and production volumes, pricing pressure and unfavourable forexrates dampened revenue and margins. Potential acquisitions could boost earnings although overseas operations lack scale. Maintain SELL with our TP cut to MYR3.15 (24% downside), as the operating environment remains tough with few re-rating catalysts.

1H15 earnings miss expectations. APM Automotive’s (APM) 1H15 earnings missed expectations, reaching just 41% and 35% of our and consensus estimates respectively. Weaker revenue resulted in sharperthan-expected margin contraction, offset by a normalisation of effective tax rates for the quarter under review. APM declared an interim DPS of 7.5 sen (1H14: 7.5 sen).

Margin pressure. 2Q15 revenue was softer sequentially (-3.9% QoQ) on the back of pricing pressure and lower original equipment manufacturing (OEM) (likely from disappointing Proton sales) andreplacement equipment manufacturing (REM) volumes. The resulting negative operating leverage was compounded by higher raw material costs from a stronger USD. Pretax margin contracted to 8.8% from 10.5% in the preceding quarter, bringing 1H15 margin to 9.7% (1H14: 11.6%). Overseas operations (McConnell Seats Australia) performed well but lack scale. APM’s net cash of MYR257m puts it in a strong position to make further earnings-accretive acquisitions.

Forecasts and risks. We slash our 2015-2017 earnings estimates lower by 21.1%, 27% and 26.4% respectively after updating our house USD/MYR exchange rate assumptions. We expect APM to suffer from both pricing and cost pressures that will squeeze margins. Potential acquisitions will unlikely alter its earnings profile in the foreseeable future. Risks to our recommendation and TP include higher industryvolumes, new domestic OEM supply contracts and a stronger MYR.

SELL. With consensus estimates needing to be adjusted lower and a persistently weak MYR, we see few re-rating catalysts for the stock and therefore retain our SELL call. Our TP is cut to MYR3.15 (from MYR4.30) after maintaining the 9x target P/E. At our TP, the implied P/BV is 0.51x that we think could be the base-case valuation for the stock.