Published on 29 Sep 2021.
RAM Ratings has reaffirmed the AA2/Stable rating of APM Automotive Holdings Berhad’s (the Group) RM1.5 bil Islamic Medium-Term Notes Programme (2016/2036) and the P1 rating of its RM1.5 bil Islamic Commercial Papers Programme (2016/2023). The two programmes are subject to a combined limit of RM1.5 bil.
The reaffirmation of the ratings reflects APM’s better than anticipated performance last year and expectations of a stronger showing in the next couple of years, given its sturdy position in domestic automotive parts manufacturing and the gradual recovery of the automotive sector. The pace of recovery to pre-pandemic levels may be tested by the lingering effects of COVID-19 on the economy, consumer sentiment and car sales. The performance of the automotive sector, especially after a sales tax exemption ends at the end of 2021, also remains to be seen. APM’s solid balance sheet however affords it significant financial flexibility to tide over these uncertainties.
APM is one of the largest producers of automotive parts in Malaysia. It enjoys established relationships with domestic car makers and has dedicated facilities close to large customers. These factors, along with the Group’s track record and technical expertise, serve as significant industry entry barriers to other auto parts manufacturers.
APM’s top line fell 25% in FY Dec 2020 as its plants were closed for almost 60 days pursuant to Movement Control Order (MCO) 1.0. Coupled with fixed operating expenses, the Group’s operating profit before depreciation, interest and tax (OPBDIT) more than halved to RM54.18 mil while pre-tax profit tumbled 78% to RM15.42 mil. APM’s revenue and OPBDIT still exceeded expectations, outperforming our projections of a wider impact on industry car sales. Margin pressure was not as severe as forecasted.
Revenue leapt 47% y-o-y to RM634.48 mil in 1H FY Dec 2021, returning the Group to the black. The one-month disruption from the lockdown in 1H fiscal 2021 was shorter relative to the same period last year when MCO 1.0 was in place. We expect APM’s OPBDIT to strengthen y-o-y as the relaxation of movement restrictions in mid-August 2021, pent-up demand and the rush by car manufacturers to make up for lost production time outweigh the effects of the lockdown.
APM’s balance sheet stayed conservative with a net-cash position as at end-December 2020 and end-June 2021. The Group’s funds from operations debt cover (FFODC) slipped to around 0.80 times in fiscal 2020 and 1H fiscal 2021 – lower than historical levels of above 1 time but better than our estimates and still viewed as robust and firmly supportive of its ratings. We expect APM’s credit metrics to remain solid in the next few years, keeping it in a net-cash position. FFODC will be above 0.50 times even after factoring in an increase in debts on the back of merger and acquisition activities under RAM’s sensitised projections. Operational cashflows are anticipated to sufficiently cover undemanding planned capital expenditure.
Moderating the ratings is margin pressure from fierce competition and the weak ringgit. The Group is also exposed to fluctuations in input prices especially in light of spikes in the prices of key raw materials and logistics cost. APM faces concentration risk as sales to Perodua typically account for 30%-40% of its top line. The Group is vulnerable to economic cycles, given that demand for automotive parts is highly correlated with the performance of the local automotive industry, which generally tracks the health of the local economy.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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Ratings on APM Automotive Holdings Berhad