AV Ventures (AVCB, 90.5 sen) is firmly on the path to recovery. The auto-parts component manufacturer's full-year net profit for 2009 surged 68% to RM6.8 million. It also declared a second round of dividends, bringing full-year dividends to 3.5 sen with a decent yield of 3.9%.
More significantly, this marks the first time in 12 years that the company has declared dividends, after successfully restructuring itself in the last few years and clearing all its debts. It has a strong balance sheet with minimal capex needs. Net cash improved from RM8.4 million in Sept 2009 to RM10 million in Dec 2009, or 17.1 sen per share. This accounts for 19% of the share price.
We expect AVCB's net profit to rise 10% to RM7.5 million in 2010 and 13% to RM8.4 million in 2010, with earnings per share (EPS) of 12.8 sen and 14.4 sen, respectively. At 90.5 sen, the stock is trading on low price-to-earnings (P/E) multiples of 7.1 and 6.3 times for 2010 and 2011, respectively.
Its present market capitalisation is a mere RM53 million, of which RM10 million is in net cash. If we exclude net cash from the market capitalisation, AVCB's underlying business is implicitly valued at RM43 million — or just 3.7 times our estimated Ebitda of RM11.5 million for 2010.
Recent strong results
AVCB's recent full-year earnings for FY Dec 2009 were in line with our expectations. The company's net profit surged 67.7% to RM6.8 million, 13% above our forecast of RM6 million. The variance with our forecast was largely due to a tax writeback of RM300,000.
For the year, turnover rose 31.7% to RM86.6 million, boosted by three-quarters of contribution from the newly launched Proton Exora MPV. We understand sales to Proton — for the Exora as well as components for other existing models, accounted for just over 70% of total sales.
Following the launch of the Proton Exora in April 2009, AVCB's financial performance has turned around strongly. It has been operationally profitable each quarter, instead of relying on asset gains to boost earnings.
Pretax profit for the year rose by 19.8% to RM6.8 million. This was proportionately less than the growth in revenue due to several exceptional items in 2008 — namely RM800,000 in gains from the sale of two PROPERTIES [ ] and RM3.1 million negative goodwill from the acquisition of two companies.
Excluding these one-off items, underlying profits improved significantly. Ebitda more than doubled from RM4.5 million to RM10.4 million, with operating margins rising from 6.8% to 12%. These margins were the highest since 2005, and bring them closer to the 13.5%-14% levels in 2004-2005. They later slumped to 6.4%-7.8% in 2006-2008 when capacity utilisation fell.
An interim dividend of 1.5 sen was earlier declared for 2009, its first dividend in 12 years. A final dividend of two sen has been proposed, bringing full year dividends to 3.5 sen, or a yield of 3.9%.
Outlook hinges on Proton
AVCB's prospects continue to hinge largely on the success of the Proton Exora MPV, for which it is supplying a large number of components, including shaft steering systems, wiper and washer systems and window regulators. Proton accounts for over 70% of total sales.
The company is poised for a sustained performance in 2010, with a full-year contribution from the Proton Exora, as compared with three quarters in 2009. Nonetheless, we do not expect the Exora's three quarter contributions in 2009 to be pro-rated equally to 2010, as monthly demand will decline after the initial spurt of sales and excitement caused by a new launch.
The Exora has been well received due to its design and affordability, at under RM80,000 for a seven-seater powered by a 1.6-litre CamPro engine. Proton has also tapped the regional market with some success in Indonesia. It has also been launched in Singapore, Brunei and Thailand.
The Exora's competitor, the Perodua Alza MPV was launched on Nov 23, 2009 and has also been well received, with 8,000 units already on the road and total bookings of over 20,000 units. The smaller, 1.5-litre 7-seater MPV is priced between RM56,000 and RM64,000.
On Nov 21, 2009, Proton launched the Exora Basic, a lower-end, no-frills manual variant of the Exora priced from RM57,548, which will compete with the Perodua model.
There were earlier concerns over stiff competition from the Perodua Alza for the Proton Exora. Fortunately, this was not to be the case, as both models have enjoyed relatively strong sales. The economic recovery has increased overall car sales in recent months — and enlarged the pie for all car players. This has allowed the two MPV models to cater for different segments.
Motor outlook more positive
The outlook for the motor sector has improved considerably as the economic recovery gained traction and consumer confidence improved.
Malaysia's total auto sales fell by a much smaller-than-expected 2% to 536,905 vehicles in 2009, well ahead of an earlier forecast of 480,000 vehicles as sales increased in the final quarter of the year. The Malaysian Automotive Association expects auto sales to rise 2.4% to 550,000 vehicles in 2010, but concedes it could even exceed the record high of 552,614 units sold in 2005.
Proton Edar, Proton's marketing arm, said in Feb 2010 that it aimed to sell 165,000 Proton cars this year from 148,027 units last year. Over the medium term, Proton has a pipeline of new models, including the Persona replacement and Perdana enhancement models that will benefit its component suppliers.
The relatively positive outlook for Proton and Malaysia's auto sector augurs well for AVCB. The company has turned around nicely, with a clean balance sheet after the earlier asset disposals and in-house restructuring exercise.
Major risks for the company would be largely macro driven — namely the strength of the ongoing global economic recovery and risks of a slowdown in the second half of 2010 when stimulus measures are withdrawn. There are also risks that improving car sales may be stymied when interest rates ultimately rise, but any rise in interest rates, we believe, will be small.
Note: This report is 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.
Friday, March 19, 2010
AV Ventures firmly on recovery mode
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