After a particularly weak performance in 2QFY11, AutoV Corp Bhd’s financial performance improved in 3Q, although profit fell on a year-on-year (y-o-y) basis.
The auto parts manufacturer’s earnings continue to hinge largely on sales of the Proton Exora multi-purpose vehicle, which has driven the company’s growth in the last two years. Like most models, Proton Exora is now seen as “matured”, with sales tapering off.
Still, 3QFY11 fared better than 2Q as the previous quarter was affected by changes in the Hire Purchase Act which created some uncertainties, as well as the March earthquake and tsunami in Japan which disrupted supplies, especially to non-national cars, which make up 30% of AutoV’s sales. These concerns have since eased.
For 3QFY11, revenue rose marginally by 3.9% to RM27.35 million, partly due to the acquisition this year of JP Metal Sdn Bhd, a metal stamping firm acquired from related company Jotech Holdings Bhd for RM7 million.
Pre-tax profit declined 37.2% y-o-y to RM2.02 million, although it was better than 2QFY11’s RM1.7 million. Net profit fell 40.2% y-o-y to RM1.26 million, but was above the RM0.8 million reported in 2QFY11.
For the first nine months of 2011, revenue declined 3.8% y-o-y to RM77.18 million. Pre-tax profit declined 45.7% y-o-y to RM6.03 million while net profit fell 57.6% y-o-y to RM4.01 million, or 6.9 sen per share.
These numbers were within our expectations, with the nine-month results accounting for about 60% of our full-year forecast.
AutoV’s share base has increased by 6.5 million shares to 64.88 million following the completion of the acquisition of Proreka (M) Sdn Bhd in November.
AutoV’s earnings continue to hinge largely on the success of Proton, which accounts for 70% of its total sales, and the Exora in particular over the last two years.
Management is optimistic of a stronger 4Q as Proton Exora’s sales have picked up again in recent months. Sales of the multi-purpose vehicle have slowed over the past year, after the earlier large pent-up demand following its launch.
We understand there will be a new turbo-charged Exora model to be introduced next year, which should help rejuvenate sales.
Over the medium term, Proton has a pipeline of other new models, including the Persona replacement and Perdana enhancement models. We understand AutoV will supply a number of components for the Persona replacement model, expected to be launched next year.
The acquisition of Proreka will also improve earnings. A tier-1 vendor and manufacturer of OEM and ODM automotive parts, Proreka is expected to give AutoV added turnover of RM60 million, boosting the latter’s current RM100 million annual revenue base.
However, earnings forecasts are largely academic for AutoV as the company will cease to exist as a listed entity once the proposed merger with two other related companies under Temasek Formation Sdn Bhd goes through.
In July, Temasek Formation, headed by businessman Datuk Goh Tian Chuan, proposed the merger of AutoV, Jotech Holdings Bhd and AIC Corp Bhd into a single listed entity, via a share swap valued at RM696 million.
Goh is the major shareholder of all three companies. The exercise is expected to be completed by end-1Q12.
Temasek Formation will have three core businesses —- auto parts, resource and semiconductors — following the merger.
All three stocks are currently trading at large discounts to their offer prices. The offer price for AutoV is RM2.38, 43% above the current share price of RM1.66. The offer price for AIC Corp is RM1.80, 51% above its current price of RM1.19, while the offer price for Jotech at 18 sen is 44% above its current price of 12.5 sen.
However, in the absence of a cash offer, these are largely academic and relative prices.
The merged company will have a combined market capitalisation of RM696 million at the offer prices, and estimated historical net profit of RM36 million for FY10.
This implies a historical price-earnings ratio (PER) of 19.3 times based on the takeover prices, which is not cheap. However, assuming an average 35% discount to the offer prices, which is roughly where the stocks are trading at now, the PER drops to 12.7 times, which is still admittedly not attractive in the current environment.
Shareholders of AutoV who opt for the merger will obtain a more diversified exposure to other sectors, including semiconductors, palm oil and coal mining, which have different risk profiles.
Management believes the enlarged entity will offer better synergies and economies of scale, as the company can grow faster and proceed with its inorganic route of expansion.
It plans to use the merger to piggyback on Temasek Formation’s larger market capitalisation and balance sheet in the hope of acquiring companies that have a higher value, as AutoV was previously restricted by its small size.
The question for AutoV’s shareholders is whether the merged entity is an attractive one, given its more balanced although diverse risk profiles, compared with a focused but also more cyclical auto-based company.
Note: These reports are brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 1, 2011.
