This article first appeared in The Edge Financial Daily, on May 19, 2016.

APM Automotive Holdings Bhd
(May 18, RM3.82)
Downgrade to sell with a lower target price (TP) of RM3.10: For the first quarter ended March 31, 2016 (1QFY16), APM Automotive Holdings Bhd reported a core net profit of RM14.8 million (-30% year-on-year [y-o-y]; -9.7% quarter-on-quarter [q-o-q]), on the back of a RM276 million revenue (-13% y-o-y; +1.2% q-o-q).

This came in below our expectations, accounting for only 18% of our full-year forecast. Our core net profit estimate excludes RM3.8 million of foreign-exchange losses and losses on derivatives. As expected, no dividend was declared for the quarter. Earnings were hit by lower sales and high raw material costs; APM’s 13% y-o-y drop in revenue was due to lower offtake from original equipment manufacturing products. This was in tandem with soft vehicle sales.

In 1QFY16, total industry volume fell by 22% y-o-y to 131,267 units, while total production volume fell by 21% y-o-y to 129,591 units. APM’s pre-tax profit declined by a bigger 59% y-o-y on margin contraction as a result of higher imported raw material costs due to a stronger US dollar against the ringgit. Profit was also dragged down by wider losses (an RM1.2 million loss versus RM700,000 in 1QFY15) on its Indonesian operation.

We expect the outlook for 2016 to remain challenging, premised on the current weak consumer sentiment and a strong US dollar against the ringgit, which will hit its operating costs. We lower our FY16 estimate (FY16E) and FY17E forecasts by 12.9% and 16.6% respectively on lower revenue assumptions.

Given the cut in earnings, we also lower our TP to RM3.10 (from RM3.56 previously), still based on an unchanged nine times calendar year 2016 earnings per share. Given the downside, we downgrade APM to “sell” (from “hold”). Risks to our recommendation include a drastic improvement in consumer spending, which may lead to a strong pickup in vehicles sales, and a strong reversal in the exchange rate. — Affin Hwang Capital, May 18