EPMB (FV RM1.38 - BUY) FY11 Results Review: Driving Into a Better Year

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

EPMB's 4Q numbers were hit by higher raw material prices andinterest expenses although these were offset by a tax deferred credit. The higher costs  led to a sharp drop in margins, which shrank 3ppts to 3.34%. We remain positiveon EPMB as  we expect the company's  earnings to be  propelled by  higher revenue from Proton and Perodua. Assuch, we maintain our earnings projections, with our BUY call retained. Our FVof RM1.38 is premised on a cheap 5x FY12 PE.

Hit by higherfinancing costs. EPMB recorded a poor set of results operationally in 4Q asits financing costs soared 42% q-o-q and 107% y-o-y amid higher raw materialprices, despite  chalking up  stronger sales during the quarter.   Nonetheless, its  weaker bottomline was offset by a substantialdeferred tax credit, which cushioned the overall impact.  Stripping off  unrealized forex losses whichwe consider as exceptional items, EPMB reported a FY11 core net profit ofRM39.4m (y-o-y: +53%, 4Q: q-o-q: -4%) on the back of RM577m revenue (y-o-y:-2%, q-o-q: +19%), which was in line with our estimate but slightly aboveconsensus.

4Q margins pinched.4Q margins  shrank as raw materialprices  shot up, causing the company'sEBIT margins to halve to 3.34% from 7.3% in the previous quarter. We also suspectthat this could also be due to higher depreciation costs.

Prospects remainbright on more contracts.  We remainpositive on EPMB as  the company's  earnings are to be boosted by  higher revenue,spurred by  the upcoming launch ofProton's new Persona  replacement  sometime in the next 2 months. We understand  that EPMB  is  supplying the  auto components  for this model.  Meanwhile, Perodua is also expandingaggressively into the export market, which bodes well for EPMB. The carmaker isalso said to be looking to expand to the Middle East market.

Maintain BUY. Wemaintain our earnings projection, with our BUY call retained. Our FV of RM1.38is premised on a cheap 5x FY12 PE.

Source: OSK188