Published on 28 Jul 2017.
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RAM Ratings has reaffirmed the AA2/Stable/P1 ratings of APM Automotive Holdings Berhad’s (APM or the Group) Islamic debt programmes. The Group’s performance has largely been within expectations and is anticipated to remain healthy, supported by its strong market positions in the supply of key products despite margin compression. The Group’s overall financial profile is also envisaged to stay robust.
APM’s slightly higher-than-expected top line in FY Dec 2016 was boosted by the better showing of its interior and plastics division and the more rapid expansion of its overseas operations. Nonetheless, earnings were weaker than envisaged due to unfavourable forex-driven cost increases, one-off expenses and the higher initial costs of the Group’s new production lines in Indonesia. In fiscal 2016, the Group largely used internal funds to finance its investments and capex needs.
“We expect the Group’s operational performance to hold steady and its financial profile to stay robust over the next 3 years. Although some of its overseas operations are still in their gestation periods, they are on track to breaking even within a couple of years,” points out Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. Meanwhile, APM continues to pursue merger and acquisition (M&A) opportunities as well as business expansion abroad. We believe the Group’s foreign operations will entail new challenges, including execution and integration risks, although we are partly comforted by the management’s cautious and measured approach to expansion. As these investments are likely to be partially debt funded, a protracted gestation period may affect the Group’s financial profile.
APM’s credit profile continues to be supported by its position as one of the top manufacturers in most categories vis-à-vis the automotive parts it supplies to car makers in Malaysia. APM also enjoys established relationships with domestic vehicle manufacturers. The Group’s Perodua seat manufacturing plant boasts among the largest local capacities, and operates in tandem with the marque’s production schedule. These factors, combined with APM’s technical expertise, are significant entry barriers to other manufacturers for certain products.
The issue ratings are also upheld by APM’s solid balance sheet, which has been underpinned by the Group’s net-cash position and strong liquidity profile for the last 10 years. APM has historically maintained a relatively low debt level, that came up to RM79.61 million as at end-March 2017, with a corresponding gearing ratio of 0.06 times (end-December 2015: RM57.59 million and 0.05 times, respectively). Its light debt load, together with a robust cashflow-generating ability, has led to sturdy funds from operations (FFO) debt coverage levels – FFO debt coverage in fiscal 2016 stood at 2.28 times.
“APM’s M&A aspirations may increase its debt load over the next 3 years, depending on the scale of investments. Nonetheless, the Group is anticipated to maintain a solid balance sheet, remaining in a net-cash position and keeping its gearing below 0.2 times. We expect FFO to stay healthy over the same period, with FFO debt coverage ranging between 0.5 and 1.5 times,” adds Lim.
Meanwhile, APM’s margins are pressured by car makers that have seen their margins eroded by fierce competition, subdued consumer sentiment and the weak ringgit. The Group’s margins have narrowed for 4 consecutive years, albeit having improved in the last few quarters. We also note that fluctuations in input prices and forex rates can affect the Group’s margins. Elsewhere, APM faces concentration risk as sales to Perodua account for 35%-40% of its top line. Further, demand for automotive parts is highly correlated with the performance of the local automotive industry, which generally tracks economic boom-bust cycles.
APM’s RM1.5 billion ICP Programme (2016/2023) and RM1.5 billion IMTN Programme (2016/2036) are rated P1 and AA2/Stable, respectively. Both programmes are subject to a combined limit of RM1.5 billion.
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