KUALA LUMPUR: RAM Ratings expects APM Automotive Holdings Bhd
to continue delivering a healthy operational performance over the medium term, despite facing stiff competition and increasingly higher costs.
It had on Thursday said it envisaged the automotive-parts manufacturer’s financial profile to remain robust.
RAM reaffirmed APM's AA2/Stable rating for the RM1.5bil IMTN programme (2016/2036) and the P1 rating of its RM1.5bil ICP programme (2016/2023). Both programmes are subject to a combined limit of RM1.5bil.
The rating agency said APM group’s credit metrics for fiscal 2017 came in within expectations, although its operating performance was slightly weaker than expected.
In FY Dec 2017, APM’s top line slipped 3.9% on-year to RM1.19bil 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% on-year to RM108.16mil.
“Nonetheless, the group’s debt level remained low at RM69.76mil as at end-December 2017 (end-December 2016: RM55.46mil) as it had used minimal borrowings to fund its investments and capex,” it said.
APM retained its net-cash position as at end-December 2017, with a robust funds from operations (FFO) debt coverage of above one time for the year.
Kevin Lim, RAM’s head of consumer and industrial ratings said APM's credit profile 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
“Meanwhile, its export and overseas operations are anticipated to expand steadily, although some of the latter will remain in gestation,” Lim added.
APM has 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 RM59.51mil, with a corresponding adjusted gearing ratio of 0.06 times (end-December 2016: RM55.46mil 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).
Lim said 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,” Lim added.
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.
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,” Lim noted.