AutoV ... Mar11

Insider Asia by Asia Analytica

Turnaround plans highly successful
Proton Persona replacement to drive growth after Exora
Cash rich, expanding business integration
Low P/E of 6.2x for 2011, minimal downside risks

AutoV Corp Bhd (AVC), formerly known as AV Ventures Corp Bhd, is firmly set on a path to strong recovery after putting its chequered past behind it. The automotive component manufacturer was set up in 1983 to supply components to Proton – and to which its fortunes were ultimately tied. The company was later affected by the 1997-98 financial crisis, Proton’s plunging sales and an Australian venture that caused large losses.

After restructuring itself in the aftermath of the 1997-98 financial crisis by streamlining operations, disposing non-core assets and securing new contracts, the former debt saddled and unprofitable company has now
emerged as a profitable, cash-rich player.

Proton’s slew of new launches, particularly the Proton Exora MPV launched in 2009, has significantly boosted sales and earnings in 2009-10, while the acquisition of two auto component companies in 2008 boosted earnings and product offerings that year. The company has recently proposed to acquire a
metal stamping unit, which will integrate its business further.

As volume sales and capacity utilization improved, so did profit margins, giving the company a bigger bottom-line impact.

Strong 2010 results
AVC recently reported net profit of RM11.4 million for FY Dec 2010, up 67.6% from RM6.8 million in 2009, on the back of an 18.5% growth in revenue to RM102.6 million. The results were a substantial improvement over net profit of RM4 million in 2008 and losses in 2006-07. Operating margins improved from 6.4% in 2006 to 12% in 2009 and 16% in 2010.

We expect net profit to increase by 13.5% to RM12.9 million in 2011, before a pick-up in growth by 21% to RM15.9 million in 2012, when the Proton Persona replacement model is unveiled. We understand AVC is likely to supply a number of parts to the project, which is still under wraps.

Following the sale of properties, AVC’s balance sheet reversed from net debt of RM1.9 million in Dec 2007 to net cash of RM10.6 million in Dec 2008. This has increased further to RM24.2 million in Dec 2010, or 41.4 sen per share.

The cash-rich balance sheet will enable AVC to easily fund future expansion and higher dividends.

In FY09, AVC paid its first dividends in over a decade, when it declared net dividends of 3.5 sen per share. We expect total dividends of 4 sen in 2010-11, which translates into net dividend yield of 2.9%, with a still low payout ratio of 14-16%.

We maintain AVC as a BUY for its attractive valuations and decent yields. At RM1.37, its shares are trading at P/Es of 6.2 and 5.1 times for 2011-2012, respectively.

The company, as a whole, appears attractively priced. With market capitalization of just RM80 million, AVC comes with RM24.2 million net cash and is expected to generate EBITDA of RM18.4 million in 2011. If we exclude net cash from the market capitalization, AVC’s underlying business is implicitly valued at RM55.8 million – or just three times estimated EBITDA.