APM Automotive - Maiden R&D contribution, rising revenue/car supports margins BUY

- We re-affirm our BUY call on APM with an unchanged fair value of RM6.50/share following the announcement of its 1Q12 result last night. Our fair value continues to peg APM at 7x ex-cash FY12F earnings.

- APM reported a 1Q12 net profit of RM33mil, including gain on divestment of its Australian radiator business, estimated at circa RM1.8mil. Core earnings of RM31mil was within expectations accounting for 21% and 23% of our and street’s full-year estimates, respectively. 

- Profit margins for segments across the board (ex-R&D) were negatively affected by higher cost of materials and a stronger Yen. However, APM should be able to recover these via periodic price review with key customers,typically done over a 6-12 months’ period. We wouldexpect a reversal of the negative margin trend once this materialises, estimated in 2H12. 

- While revenue was down by 3% YoY given lower TIV and despite the impact of higher raw material cost, earnings (+11% YoY) were supported by maiden contribution from engineering and research fees charged to a major client. Contribution from the segment swung from a loss of RM0.6mil in 1Q11 to RM2mil pre-tax earnings in 1Q12. 

- Additionally, we note that revenue per car trended higher (+15% YoY, +8% QoQ) in 1Q12 thanks to increased localisation trends, particularly given maiden supply to the Proton Preve which entails some 80% localisation rate

- Supplies to VW are delayed given what we understand, were changes in their CKD schedules. Nonetheless, once this takes off  (in 4Q12), revenue and margins should receive a boost given maiden contributions from integrated systems supply via APM’s 60:40 JV with IAC for the Malaysian market. Revenue per car set for integrated modules could be as high as RM4,000-RM5,000/car set versus current RM2,000-RM2,200/car set.

- Meanwhile, the Nissan Almera (B-segment model) will see an exceptionally high localisation rate of 40%-50% (versus Vios and City’s 30%-40% localisation rate), which should also drive higher revenue per car set for APM. The Almera is scheduled to be launched in September 2012 and TCM is targeting sales of 1,000 units per month (circa 2% of 2011 TIV of 600K). 

- From a valuation stand point, APM is cheap at 6.5x FY12F earnings (versus sector PE of 10x). Net cash of RM361mil accounts for close to 40% of market cap and ex-cash; APM trades at 4x FY12F earnings. Dividend yields remain very attractive at 8.5% (FY12F).

Source: AmeSecurities