APM endured another difficult quarter as earnings disappointed coming in below our and consensus estimates. Weak demand and price pressure floored revenue while the knock-out punch was delivered by a combination of unfavourable FX rates and negative operating leverage. We cut our estimates but maintain our SELL recommendation and MYR3.15 TP (21% downside).

Below expectations. APM Automotive’s (APM) 3Q15 results were below expectations reaching 66% of our previous forecasts and 49% of consensus estimates. The main reason for the deviation was lower-than-expected revenue from weaker OEM sales, while margins were lower. No dividend was declared in respect of the quarter under review.

Volumes and margins down. APM’s revenue for the quarter declined 16.3% and 12.4% QoQ and YoY respectively to MYR255.8m bringing 9M15 revenue to MYR879.9m (-6.4% YoY). This is consistent with the 17.2% QoQ contraction in total industry production (TIP). The higher proportionate YoY revenue contraction is likely due to pricing pressure. Auto manufacturers that are being squeezed by the higher import costs from the weaker MYR are also pressuring their suppliers. All product segments were adversely affected. EBIT margin for the quarter fell to 5.9%, reflecting the pricing squeeze, higher input costs from the weaker MYR and negative operating leverage arising from the slump in revenue.

Forecasts and risks. Although we expect a stronger 4Q15 as TIP is raised to meet the expected surge in sales from buyers looking to beat the price increases next year, we trimmed our 2015-17 estimates lower by 11.6%, 11.8% and 10.6% respectively. Risks to our recommendation and target price includes higher industry volumes, new domestic OEM supply contracts and a stronger MYR.

Maintain SELL. 2016 looks like another challenging year for the auto industry with total industry volumes likely to contract. Potential acquisitions will unlikely alter its earnings profile in the foreseeable future with no reversal in sight for the MYR. We see no re-rating catalysts for the stock at this juncture although the dividend yield could help to support the share price. No change to our MYR3.15 target price that implies a 0.53x P/B which is close to the stock’s historical trough valuations.

Falling On Hard Times

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Financial Exhibits

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Company Profile

APM is a member of the Tan Chong Group of companies and is a leading domestic manufacturer of automotive parts and components.

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Source: RHB Research - 23 Nov 2015