APM Automotive - Dividend surprise, earnings ahead of consensus BUY

• We re-affirm our BUY rating on APM Automotive (APM) at unchanged fair value of RM6.50/share following the release of its 4Q11 results last Friday. Our valuation continues to peg APM at 7x ex-cash FY12F earnings. 

• APM reported net profit of RM37mil, which brought full year core earnings to RM127mil. This was within our estimates but was way ahead of consensus accounting for 100% and 111% of full year estimates respectively. APM’s FY11F core earnings trajectory is in fact a year ahead, meeting even consensus’ FY12F projection of RM127mil.

• More importantly, APM surprised the market with its dividends (and by that, vindicating our thesis of a step-up in dividend payout over the next 3 years). APM announced a final dividend of 12sen/share, and on top of that, a special dividend of 10sen/share. These brought total FY11 dividends to 32sen/share (a whopping 60% increase against FY10 total dividend of 20sen/share). This brings dividend yield to an attractive 7%. Management guides for more active capital management going forward.

• A strong balance sheet and inefficient capital management in the past suggests further step-up in dividends. To fund potential equity raising at Warisan TC (APM’s sister company) we believe TCC (APM’s holding company) is shifting up cash from APM given: (1) APM’s idle cash hoard (RM365mil) which puts a drag on ROE; positions it best for cash extraction by TCC; (2) Unutilized tax credit of RM90mil expiring in 2013. We project higher dividends for FY12F at 40sen/share (9% div yield). 

• However, tighter credit approvals since January could pose downside earnings risk – though we doubt this will have any material impact on dividend payout. We estimate that every 1% reduction in FY12F TIV will impact earnings by 1.4%.

• Notwithstanding this, recently secured JV with IAC (International Automotive Components) allows APM access to the huge Thai auto part market. We estimate revenue of circa RM107mil/annum from the Thai JV and RM63mil/annum from the Malaysian JV. At 10% net margin, we expect both JVs to drive RM8mil/annum incremental earnings to APM, (net of IAC’s 60% stake in the Thai JV and 40% stake in the Malaysian JV) – which could raise FY12F-13F earnings by 4%-5%.

• At just 6x, FY12F earnings and 19% earnings CAGR over FY11F-13F, we believe APM is positioned as an attractive play into ASEAN’s TIV growth momentum. Hirotako’s GO at 10x PE is at a 70% premium to APM, reflecting increasing appetite for auto parts players as a proxy to the influx of foreign marques into the region.

Source: AmeSecurities