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Saturday, October 29, 2016

APM Automotive plans RM1.5b Sukuk, eyes mergers

Friday, 28 October 2016 | MYT 12:35 PM

KUALA LUMPUR: Auto parts company APM Automotive Holdings Bhd plans to undertake a RM1.5bil Sukuk as it seeks mergers and acquisition opportunities to expand its overseas operations.

RAM Rating Services Bhd had on Friday assigned an AA2/Stable rating to the proposed RM1.5bil Islamic MTN programme (2016/2036) and a P1 rating to the group’s proposed RM1.5bil Islamic CP Programme (2016/2023). The two programmes are subject to a combined limit of RM1.5bil.

The ratings agency said APM’s credit profile is supported by its position as one of the leading automotive-parts manufacturers in Malaysia.

RAM’s head of consumer and industrial ratings Kevin Lim said APM has a 40-year track record and most of the group’s products rank among the top three in terms of parts supplied to domestic car makers,.

He said APM has stablished relationships with domestic vehicle manufacturers.

“The group’s plant for Perodua seats boasts one of the largest local capacities, and operates in tandem with the marque’s production schedule. These factors, combined with APM’s technical expertise, represent significant entry barriers for certain products,” Lim added.

The rating is also based on APM’s solid balance sheet and commendable liquidity position.

RAM Ratings pointed out APM has historically maintained a very low debt level, which largely consists of short-term trade financing.

It has healthy cash reserves as reflected in its net-cash position for the last five years. Its low debt level, together with a robust cashflow-generating ability, has led to sturdy funds from operations (FFO) debt coverage levels.

“Moving forward, APM plans to pursue M&A opportunities to expand its overseas operations.

“Depending on the level of investment, the group’s debt load is expected to increase over the next 3 years, although its balance sheet is anticipated to remain solid, with respective gearing and net gearing ratios of not more than 0.3 and 0.1 times. We also expect its FFO debt coverage to range between 0.3 to 0.5 times,” Lim said.

However, he cautioned that foreign operations may entail challenges that are new to the group, including execution and integration risks, while a protracted gestation period may affect its financial profile.

But Lim said RAM Ratings was nonetheless assured of the management’s cautious and measured approach.

On another note, APM faces significant concentration risk as sales to Perodua – which accounts for some 35% of the domestic automotive market’s total industry volume (TIV) - have accounted for 35%-40% of its top line in the last five years.

“However, the risk of business loss is largely mitigated by the integration of the Group’s operations with Perodua’s, and APM’s established track record.

“Amid the keenly competitive business landscape, automotive and auto-parts manufacturers are likely to experience increasing margin compression.

“APM’s operating margins had declined in the last three to four years due to pricing pressure from auto manufacturers and rising input costs, while unfavourable forex movements had also adversely affected its margins in the last one to two years.

“The industry is expected to remain intensely competitive amid the slow growth of a maturing industry, new and competitively priced models, and subdued consumer sentiment,” he said.

Demand for automotive parts is highly correlated to the performance of the local automotive industry, which generally tracks economic boom-bust cycles.

Consumers normally defer vehicle purchases amid economic uncertainties, as observed this year.

The total industry volume for the January-September 2016 shrank 14% on-year due to weak sentiment and tight financing conditions.

Moreover, policy changes in this highly regulated industry will directly affect industry players and influence consumers’ buying behavior.

APM started about 45 years ago and manufactures a wide range of automotive components covering suspension parts, seats, interior and exterior plastics, heat-exchange and electrical components.

The group was formed in 1999, following the de-merger exercise of Tan Chong Motor Holdings Bhd, and was listed on the Main Market of Bursa Malaysia on Dec 15 that year.

APM has operations in Malaysia, Australia, Indonesia, Vietnam and the Netherlands.

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