AVENTUR ... Jun10

S & P Results Review & Earnings Outlook

 AVV’s 1Q10 results were ahead of expectations. Net profit for the quarter of MYR3.5 mln was sharply improved on the 1Q09 net loss of MYR0.4 mln but flat QoQ.

 The stronger earnings YoY was due to the launch of the Proton Exora MPV in April 2009 for which AVV is a key component supplier. Proton saw registrations of 7,330 units of the Exora during the quarter. Consequently, revenue for the quarter was up 93.8% YoY and 3.1% QoQ.

 AVV’s EBIT margin improved to 13.8% I 1Q10 from 12% in 4Q09. Management reports that raw material costs have been relatively stable in recent months and expects margins to be sustainable going forward. But this will depend on the rate of component deliveries for the Exora that is now facing stiffer competition from existing and new models in the market, e.g. the new Perodua Alza MPV. Initial hopes
for the Exora in regional export markets of Indonesia and Thailand have not yet translated into increased orders for AVV. This suggests challenges in penetrating new markets with entrenched market players. AVV continues to enjoy a low effective tax rate -- attributed to unabsorbed tax losses and capital allowances. We expect AVV’s tax rate to normalize in 2011.

 We lift our 2010 and 2011 net profit estimate to MYR13.1 mln and MYR10.4 mln (from MYR7.3 mln and MYR8.0 mln) respectively after factoring in stronger margins and higher effective tax rate in 2011.

Recommendation & Investment Risks
 We raise our call to Buy (from Hold) lift our 12-month target price to MYR0.91 (from MYR0.83).

 Our new target price is derived after rolling over the reference year to 2011 (from 2010) and applying a target PER of 5x (down from 6.5x). The target PER multiple is below the target range of between 6.5x-11x for autoparts companies within our coverage to reflect AVV’s smaller market capitalization, smaller product range, smaller business scale, a shorter track record, low traded volume and the high level of dependence on Proton. It has also not yet demonstrated an ability to
consistently secure new component supply contracts.

 Nonetheless our Buy recommendation is made on valuation grounds. AVV trades at low 2011 PER multiples of 4.5x – which are at a significant discount to the sector average.

 Risks to our forecasts include: (i) lower-than-expected auto sales, (ii) a sustained rise in raw material prices that could squeeze operating margins and (iii) a quicker-than-expected fall-off in the demand for the Exora MPV as competition heats up. In addition, the thinly traded volumes expose the stock to share price volatility, in our opinion.