APM Automotive Holdings Bhd
(May 15, RM5.05)
Maintain hold with unchanged target price (TP) of RM4.60: APM’s core earnings for the first quarter ended March (1QFY15) came in largely in line with our but below consensus’ expectations.

Core net profit for the quarter came in at RM21.1 million (+24.1% quarter-on-quarter; -21% year-on-year [y-o-y]) which represents about 22% of our and 19% of consensus’ full year expectations.

The decline in earnings was mainly attributed to: (i) increased pricing pressures from existing original equipment manufacturers (OEMs); (ii) rising operating costs; and (iii) higher imported raw material costs (due to the appreciation of the US dollar against the ringgit). 

The earnings before interest and tax margin for 1Q came in lower y-o-y at 9.3% compared with 10.7% in the previous year.

The deviation in earnings was mainly due to weaker margins on the back of increased pricing pressures.

APM’s 1Q revenue rose 3.3% y-o-y thanks to increased revenue from its interior and plastics segment (+2.1% y-o-y) as a result of a rise of about 7% y-o-y in total industry production.

In addition, there was substantial improvement in sales growth from its overseas division, albeit from a low base (+90.2% y-o-y), which partially offset the weaker OEM demand from its other major product segments.

The upturn in its overseas division (about 7% of revenue) was mostly due to the acquisition of the McConnells Seats Australia Pty Ltd business in the second half (2H) of FY14, which led to a segmental profit before tax (PBT) increase of 87.4% y-o-y to RM1.5 million.

We make no changes to our earnings forecasts. While we are positive on the group’s efforts in gradually growing its overseas contributions to diversify its income stream, we are staying on the sidelines for now as we believe persisting pricing pressures from OEMs will continue to weigh on earnings in the near term.

We maintain our “hold” call with an unchanged TP of RM4.60 based on an existing nine times price earning ratio (in line with the stock’s three-year historical average).

Key risks to our view include a sharp spike in commodity prices (such as aluminium and steel), slower or stronger-than-expected consumer spending on big-ticket items such as cars, and a weaker or stronger ringgit. — Affin Hwang Investment Bank Bhd, May 15

This article first appeared in The Edge Financial Daily, on May 18, 2015.