(April 15, RM4.44)
Reaffirm buy at RM4.47 with fair value of RM5.40: Our valuation continues to peg APM at ex-cash FY10F price earnings (PE) of seven times. APM is now trading at a huge 57% discount to sister company Tan Chong Motor Holdings Bhd's valuation (ex-Segambut land value) of 11.6 times FY10F earnings per share (EPS).
APM announced recently that dealings with sister company - revenue from Tan Chong - had exceeded its earlier estimated value (which is 10% of APM's total revenue) as stated in its circular. APM will have to seek, at its next meeting with shareholders, approval to increase its intended related party transaction limit to over 20% of its revenue. This will not disrupt operations in any way.
What this means is that contribution from Tan Chong increased substantially in 1Q10, reinforcing our earlier view that inventory replenishment activities by auto manufacturers, especially Tan Chong given its very conservative CKD (completely knocked-down) kit orders in FY09, will likely give APM's earnings a boost for the next few quarters.
Inventory levels at auto manufacturers - Tan Chong (+34% q-o-q) and Proton (+9% q-o-q) - indicate signs of an uptick in 4Q09 but inventory days are still lean at 30% to 40% lower than peak levels in 4Q08. Tan Chong will increase its production to two shifts by June while Perodua will raise its production of the Alza by 50% to 6,000 units/month. Additionally, Perodua announced record sales in March of 18,500 units which brings its 1Q10 sales to 47,755 units. Annualised (at 191,000), this would be 9% higher than even Perodua's own projection.
Our projections for APM remain 44% to 55% higher than consensus, and we expect 1Q10 earnings, which will be announced next month, to strongly outperform conservative consensus estimates of just RM83 million net profit for FY10F versus our RM118 million projection. We would not be surprised if APM's earnings were to account for as much as one third of consensus' estimate in 1Q10.
APM is positioned favourably as a cheap play into a strong cyclical recovery in the auto sector. Its net cash (RM1.40/share) accounts for over 30% of market cap. Ex-cash, APM trades at just five times FY10F earnings.
More importantly, APM is lagging its peers in Thailand, which trade at a range of nine to 14 times FY10F EPS. APM is trading at 44% to 64% discount despite its superior return on equity (ROE), strong free cash flow, growing dividends and a solid balance sheet.
The recent strong run-up in Tan Chong's share price and generally other auto manufacturer's, positions APM as a favourable arbitrage opportunity as it would be the ultimate beneficiary of any rise in sales for auto manufacturers and an earlier play into such catalysts. APM's discount to auto manufacturers has now expanded to 41% versus a historical average discount of 29%. - AmResearch, April 15
This article appeared in The Edge Financial Daily, April 16, 2010.