AutoV ... Aug10

S & P Results Review & Earnings Outlook

• AV’s 2Q results were broadly in line with expectations. Net profit of MYR3.9 mln was 12.2% higher QoQ and 80.5% up YoY. Cumulative net profit for 1H10 of MYR7.4 mln was 317% higher YoY and amounted to 56% of our previous 2010 profit estimate.

• The improved profitability was attributed to steady sales of components to Proton (PROH MK, MYR4.49, 4-STARS), mainly in respect of the Exora MPV that was launched April 2009. Management also cited improved market sentiment, resulting in higher demand for the group’s products. Consequently, 1H10 revenue advanced 38.7% YoY to MYR53.9 mln. Operating margin for 1H10 improved to 14.4% from 9.9% in 2H09, reflecting the 13% HoH revenue growth. Effective tax rates remained low due to the utilization of tax losses, which are expected to be exhausted after 3Q10. Hence, effective tax rates are expected to normalize from 4Q10 onwards.

• While Exora sales have remained steady at 2,000-2,500 units per month this year, sales in 2H10 could be slightly shallower HoH due to the festive holidays and year-end effect. There could be some added market interest after Proton launches the Exora Turbo model in early 2011. AV is only expected to be able to further boost sales to Proton when it introduces the Persona replacement model toward end-2011.

• Our 2010 profit estimate is broadly unchanged. However, we lift our 2011 forecast by 6.3% after tweaking our margin assumptions.

Recommendation & Investment Risks

• We reiterate our Buy call and lift our 12-month target price to MYR0.97 (from MYR0.91) in line with our higher earnings estimates.

• Our 12-month target price is derived after ascribing a target PER of 5x (unchanged) to 2011 earnings and includes the forecast DPS for 2010. The target PER multiple is below the target range of 6.5x-11x for other autoparts companies within our coverage. This reflects AV’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, we believe AV is attractively valued, given its 4.5x 2011 PER.

• 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. In addition, the thinly traded volumes expose the stock to share price volatility, in our opinion.