Stock Name: EPMB
Company Name: EP MANUFACTURING BHD
Research House: OSK
EP Manufacturing Bhd
(April 29, 78.5 sen)
Maintain buy at 76.5 sen with revised target price of 89 sen (from 78.7 sen): EPMB registered revenue and net profit of RM125.5 million and RM8.6 million respectively for 1QFY11. Revenue fell 16% y-o-y (q-o-q: 5%) given the lower top line contribution arising from the slowdown in Perodua's volume in 1Q (by 4.1% y-o-y and 3.6% q-o-q) as production of the existing Myvi is expected to cease sometime end-1H.
But EPMB dropped a surprise with earnings soaring 109% y-o-y and 15% q-o-q, which beat our expectations as its 1Q earnings represented 40% of our full-year forecast.
Management also announced a tax-exempt final dividend for FY10 of one sen per share, bringing its full-year dividend to two sen per share.
Despite the lower revenue from its auto division, the segment's margins expanded as earnings before interest and taxes (Ebit) margin improved from 4.96% and 7.32% in Q1FY10 and Q4FY10 respectively to 8.68% during the quarter.
While economies of scale are unlikely in the recent quarter given Perodua's lower production volume, we suspect that the margin boost at Ebit level was due to the lower amortisation rate for Perodua's production line (based on unit output) as a significant portion was amortised in 2010, during which the volume sold beat initial projections.
Hence, we suspect that the better earnings before interest, taxes, depreciation and amortisation (Ebitda) margin amid rising raw material prices could have been relatively lower than in 4QFY10 but slightly higher than 1QFY10 owing to enhanced operating efficiency. A tax credit also contributed to the improved bottom line.
Despite the better than expected 1Q earnings, we are still concerned over a potential slowdown from Perodua in 2Q and 3Q arising from an acute disruption in components supply after Japan's earthquake in March, although things could pick up in 4Q once the new Myvi is launched.
After revising our numbers earlier and downgrading autos to underweight, we feel it is too early to make any changes to operating earnings.
Below the operating level, we are slashing off minority interest (as EPMB has fully acquired the remaining 4% stake from Proton Holdings) and lowering the effective tax rate from 25% to 20% in view of the favourable tax incentives EPMB will enjoy on investment allowances over the next three years as per management guidance.
This ultimately raises our earnings by 13% for FY11/13 and our fair value to 89 sen from 78.7 sen, premised on six times price-earnings ratio (PER) with our 'buy' call maintained. EPMB still offers a decent upside given its attractive valuation as it is still trading below its eight to nine times five-year historical forward PER.
Instead, the stock is trading at 5.2 times FY11 earnings per share, with 50% of the share price representing its free cash flow. Maintain 'buy'. ' OSK Research, April 29
This article appeared in The Edge Financial Daily, May 3, 2011.
Company Name: EP MANUFACTURING BHD
Research House: OSK
EP Manufacturing Bhd
(April 29, 78.5 sen)
Maintain buy at 76.5 sen with revised target price of 89 sen (from 78.7 sen): EPMB registered revenue and net profit of RM125.5 million and RM8.6 million respectively for 1QFY11. Revenue fell 16% y-o-y (q-o-q: 5%) given the lower top line contribution arising from the slowdown in Perodua's volume in 1Q (by 4.1% y-o-y and 3.6% q-o-q) as production of the existing Myvi is expected to cease sometime end-1H.
But EPMB dropped a surprise with earnings soaring 109% y-o-y and 15% q-o-q, which beat our expectations as its 1Q earnings represented 40% of our full-year forecast.
Management also announced a tax-exempt final dividend for FY10 of one sen per share, bringing its full-year dividend to two sen per share.
Despite the lower revenue from its auto division, the segment's margins expanded as earnings before interest and taxes (Ebit) margin improved from 4.96% and 7.32% in Q1FY10 and Q4FY10 respectively to 8.68% during the quarter.
While economies of scale are unlikely in the recent quarter given Perodua's lower production volume, we suspect that the margin boost at Ebit level was due to the lower amortisation rate for Perodua's production line (based on unit output) as a significant portion was amortised in 2010, during which the volume sold beat initial projections.
Hence, we suspect that the better earnings before interest, taxes, depreciation and amortisation (Ebitda) margin amid rising raw material prices could have been relatively lower than in 4QFY10 but slightly higher than 1QFY10 owing to enhanced operating efficiency. A tax credit also contributed to the improved bottom line.
Despite the better than expected 1Q earnings, we are still concerned over a potential slowdown from Perodua in 2Q and 3Q arising from an acute disruption in components supply after Japan's earthquake in March, although things could pick up in 4Q once the new Myvi is launched.
After revising our numbers earlier and downgrading autos to underweight, we feel it is too early to make any changes to operating earnings.
Below the operating level, we are slashing off minority interest (as EPMB has fully acquired the remaining 4% stake from Proton Holdings) and lowering the effective tax rate from 25% to 20% in view of the favourable tax incentives EPMB will enjoy on investment allowances over the next three years as per management guidance.
This ultimately raises our earnings by 13% for FY11/13 and our fair value to 89 sen from 78.7 sen, premised on six times price-earnings ratio (PER) with our 'buy' call maintained. EPMB still offers a decent upside given its attractive valuation as it is still trading below its eight to nine times five-year historical forward PER.
Instead, the stock is trading at 5.2 times FY11 earnings per share, with 50% of the share price representing its free cash flow. Maintain 'buy'. ' OSK Research, April 29
This article appeared in The Edge Financial Daily, May 3, 2011.
No comments:
Post a Comment