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12 Jul | Thursday
RAM Ratings reaffirms APM Automotive’s sukuk ratings

RAM Ratings has reaffirmed the AA2/Stable rating of APM Automotive Holdings Berhad’s (APM or the Group) RM1.5 billion IMTN Programme (2016/2036) and the P1 rating of its RM1.5 billion ICP Programme (2016/2023). Both programmes are subject to a combined limit of RM1.5 billion. The Group’s credit metrics for fiscal 2017 came in within expectations, although its operating performance was slightly weaker than expected. Despite facing stiff competition and increasingly higher costs, we anticipate APM to continue delivering a healthy operational performance over the medium term. The Group’s financial profile is also envisaged to remain robust.

In FY Dec 2017, APM’s top line slipped 3.9% y-o-y to RM1.19 billion due to fewer parts supplied for new car models and also lower sales from marques that performed poorly. The weaker revenue, together with unfavourable forex-driven cost increases and losses from overseas operations, also weighed on its operating profit before depreciation, interest and tax, which declined 11.1% y-o-y to RM108.16 million. Nonetheless, the Group’s debt level remained low at RM69.76 million as at end-December 2017 (end-December 2016: RM55.46 million) as it had used minimal borrowings to fund its investments and capex. APM retained its net-cash position as at end-December 2017, with a robust funds from operations (FFO) debt coverage of above 1 time for the year.

The credit profile of APM continues to be supported by its position as one of the largest automotive-parts manufacturer in Malaysia. “The Group’s domestic operations will be anchored by key products that are expected to remain strong performers. We also expect APM to regain some lost market share through upcoming launches of new models,” points out Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. “Meanwhile, its export and overseas operations are anticipated to expand steadily, although some of the latter will remain in gestation,” he adds.

APM also enjoys established relationships with domestic vehicle manufacturers and has dedicated facilities close to its large customers. The Group’s Perodua seat-manufacturing plant boasts among the biggest local capacities, and operates in tandem with the marque’s production schedule. These factors, combined with APM’s track record and technical expertise, serve as significant entry barriers against other manufacturers of certain products.

The ratings are also upheld by APM’s solid balance sheet, underpinned by the Group’s net-cash position and strong liquidity profile in the last decade. APM has historically maintained healthy cash reserves and relatively low debt levels. As at end-March 2018, its borrowings came up to RM59.51 million, with a corresponding adjusted gearing ratio of 0.06 times (end-December 2016: RM55.46 million and 0.07 times). Its light debt load, together with a robust cashflow-generating ability, led to sturdy debt coverage; its adjusted FFO debt coverage stood at 1.3 times in fiscal 2017 (fiscal 2016: 1.63 times).

APM will continue pursuing M&A opportunities and business expansion abroad. “Depending on the level of investment, its debt load may increase over the next three years. Even so, we expect its balance sheet to remain strong given the Group’s historically measured approach in business expansion, with a net-cash position while its FFO debt coverage level stays above 0.5 times over the same period,” explains Lim. However, such foreign operations may entail new challenges, including execution and integration risks, while a protracted gestation period may affect the Group’s financial profile.

Meanwhile, APM’s margins are pressured by car makers whose margins have been affected by fierce competition, subdued consumer sentiment and the weak ringgit. The Group’s margins had been trending downwards for five consecutive years, before recovering in 1Q FY Dec 2018. We also note that fluctuations in input prices and forex rates can affect its margins. Notably, APM faces concentration risk as sales to Perodua account for 30%-40% of its top line. Demand for automotive parts is also highly correlated with the performance of the local automotive industry, which generally tracks the well-being of the economy.

Analytical contact
Ben Inn
(603) 7628 1024
ben@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

Date of release: 12 July 2018

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2018 by RAM Rating Services Berhad’s

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