Margin Pressure Not Easing

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.81

EPMB - Weak Margins Rein in 1Q Earnings Growth

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.58

EPMB - FY13 Earnings Below Expectations

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.66

EPMB - Inevitable Margin Compression

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.70

EP Manufacturing Berhad - Disappointing 2Q results

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.79

No Catalysts in the Near Term

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.84

Lacklustre 1Q13 Result

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.67

Margin Issue

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: HOLD

Target Price: 0.87

Some Value Emerging

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: HOLD

Target Price: 0.89

EPMB (FV RM0.94- NEUTRAL) Company Update: Provides More Clarity on Acquisition

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: HOLD

Target Price: 0.94

EPMB's management reassured investors that it can cope withthe high net gearing position after acquiring Maju Expressway as its free cashflow is expected to be reinforced by a likely toll hike in 2013. We slashearnings by 45-58% on expectations that MEX will not be earnings accretiveuntil 2015. While we concur with management that the toll concession is apotential cash cow, EPMB would likely become an unappreciated counter in viewof the depressed margins arising from high interest and depreciation costs andthe fact that the acquisition does not jive with its core automotive business. Assuringconfidence.  Yesterday, EP Manufacturing(EPMB) organized an analyst briefing to address concerns and provide clarity onits recent proposal to acquire Maju Expressway (MEX). The key takeaways of thebriefing are as follows:

- EPMB emerged as the successful bidder, just bidding RM50mhigher than the next bidder which could possibly have been a government-linked investmentfund.

- As traffic growth will be aggressive over the next fewyears (at high teens) from the development of Putrajaya and Cyberjaya and withthe completion of KLIA2 by next year, management is confident that it can copewith the high net gearing position (of 435% up from 33% last year) as its cashflow will be strong. We concur with the management's view on this, but we areconcerned with the higher depreciation and interest costs depressing overallmargins. We estimate that free cash flow generated to be RM45m in FY13 andRM79.4m by FY12. As the toll matures in 10-15 years, free cash flow generatedwill be robust and will exceed RM250m annually.

- Management sees this as an attractive  investment opportunityas in  the  current political climate, building new tollinfrastructures will be an uphill task as this will involve navigating trickyissues related to politics and land acquisition.

- The toll hikes scheduled for 2013, 2018 and 2023 could notbe disclosed as per concession agreement. As EPMB is paying the full price, thepotential tariff hike could be higher than our earlier estimate of RM0.50 sento RM2.40 (from an average collection of RM1.90 per vehicle in the past 3years). We estimate a RM1 tariff increase in our DCF model for MEX.

- Management guided that earnings will only be accretive by2016 at the latest. With the toll hike coming next year (definitely afterelections), we expect MEX to only be profitable by 2014 and report a net incomeof RM7.2m by then.

- The potential opening of the  Seri Kembangan interchangewill be decided by  the government in thenext few months. There are signs that this is likely to go through judging fromthe strong demands by the public to ease traffic congestion in this area.

- Other than revenue from toll collections, advertising andrental collections from R & R outlets, there could be other ways to expandrevenue base.  

- Issuance of RM1.25bn and RM225m sukuk will have 20- and7-year maturities at 5-6%. Indicative rating at AA-, which is the same ratingon the current sukuk floated.

Source: OSK188 

Short Term Pain Long Term Gain

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.89

MEX - Over-stretching Balance Sheet

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: SELL

Target Price: 0.89

EPMB (FV RM1.15 - NEUTRAL) Company Update: A Pricey Concession

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: HOLD

Target Price: 1.15

EPMB has entered into an acquisition agreement with MajuHoldings to acquire the MEX for RM1.15bn, which including assuming debtstotaling RM550m, values the deal at RM1.7bn. Although traffic growth isexpected to be resilient, from a valuation standpoint, the deal  looks pricey and  raises  our  concern  that it may cause EPMB's net gearing to  to 457% this year.  Besides, the high interest cost will erode earnings in the immediate term.  Given its excellent run but this pricey acquisition,we downgrade EPMB to a NEUTRAL from a BUY, slashing  our fair value from RM1.38 to RM1.15.

The proposedacquisition of Maju Expressway (MEX). EP Manufacturing announced that ithas entered into an acquisition agreement for the proposed acquisition of MEXfor RM1.15bn, which including debt totaling RM550m, values  the deal at RM1.7bn. The purchase will be mostly funded by borrowings totalingRM1.575bn, with the remaining portion  tobe funded  by  internal cash.  Using the privatization of PLUS  forwhich EV/EBITDA was used as a valuation yardstick, we deem the deal's valuationon the high side.  The acquisition'sEV/FY13 EBITDA of 14x represents a 55% premium versus the valuation for PLUS.While the valuation is somewhat high, management has guided that IRR willbe  around  17%, which we reckon  may somewhat compensate for the higher valuation versus PLUS' IRR of 14%. At13x EV/EBITDA, the payback period may stretch to 16 years, which is positivelyshorter than the concession's remaining 21 years.

Resilient trafficgrowth. Since commencing operation in 2008, traffic on MEX has grown by aCAGR of 21% from a daily traffic of 51,073 to approximately 90,000 in 2011. Thegrowth is attributed to: i) to the increasing population in Putrajaya andCyberjaya, ii) the preferred route for travel to these 2  areas since thehighway  cuts through highly populatedtownships and fast developing areas, and iii) it is the preferred route toKLIA, riding on the growth of air travel, notably the low cost carrier segment.

High interest to costhits earnings; downgrade to NEUTRAL. We estimate a decline in profits forFY12 (by 36%) due to higher interest expenses although earnings for FY13 andFY14 earnings will subsequently improve. The company's  expanded share base (including50m shares from the issuance of new securities) will dilute its EPS by 8-22% despitethe higher profits  anticipated for  FY13. As the acquisition cost will be heavilyfunded by debt, EPMB will see its net interest expenses soar from RM11.4m inFY11 to RM24m per annum. This would cause its net gearing of 33.2% in FY11 tobloat to 457% in FY12.  Thus we downgradeEPMB to a NEUTRAL from BUY, with our fair value slashed from RM1.38 to RM1.15.

Source: OSK188

Eyeing for MEX?

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: BUY

Target Price: 1.11

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

On Auto-mode

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: BUY

Target Price: 1.11

AUTOMOTIVE (UNDERWEIGHT) Sector Update: Weak Loan Approvals Cause Hard Landing

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

Stock Name: UMW
Company Name: UMW HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 6.18

Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 4.00

Stock Name: MBMR
Company Name: MBM RESOURCES BHD

Research House: OSK

Price Call: SELL

Target Price: 3.69

Stock Name: DELLOYD
Company Name: DELLOYD VENTURES BHD

Research House: OSK

Price Call: HOLD

Target Price: 3.88

TIV for the first month of 2012 was a shocker, sinking 25.3%y-o-y and 14.2% m-om due to weak loan approvals and the long public holidays inJan,  and to some extent, the impact ofthe Thai floods. The banks' new lending guidelines effective 1 Jan 2012 led tothe rejection of many loan applications for vehicle purchases. As approvalsrates in 2HFY11 were  already at a low of48%, we expect this to have gone even lower to an estimated  30%-40% for Jan, but  retain our TIV growth forecast of 1.1% for2012 as it  may  be premature to make drastic changes  in estimates for  the first month of a  year. We  keep our bearish view on autosand continue to advocate taking positions in fundamentally undervaluedautopartsstocks with earnings upside potential that may win new contracts asautomakers aim for higher localization. EPMB is our only BUY among our autostocks.

Sharpest contractionsince Japan's  tsunami.  TIV for the first month of 2012 was a stinker,plunging 25.3% y-o-y and 14.2% m-o-m due to weak loan approvals and the longholidays during the month, and to some extent, the aftermath of Thailand's destructivefloods. The passenger segment shrank sharply by 26% y-o-y, led by passenger cars and 4WDs, which fell 30% and 48%y-o-y respectively. The commercial segment was also not spared, posting a 21%y-o-y decline.

New lendingguidelines  keep  buyers away.  Bank Negara's new lending guidelines effective1 Jan 2012 and implemented by banks subjecting loan approvals to purchasers'debt service ratio (capped at circa 60% notably for most civil servants) to totalnet income as opposed to the previous debt service ratio averaging at 70% ofgross income (a higher denominator) resulted in a lot of rejected loanapplications from potential vehicle buyers. The new guidelines do not onlyapply to the hire purchase segment but across the board, including housingloans, credit cards and personal loans. According to Proton dealers, approvals rates back in 2HFY11were already at a low of 48%, which we estimate may have trended even lower to30-40% in Jan. 

Policy  U-turn?  The central bank's aim of promoting financialprudence via the new lending policy is not welcome news in boosting sales ofbig ticket items, notably housing and vehicle purchases. While the degree ofleniency on the denominator (ie gross income) is unlikely to be reversed, banksare still flexible when it comes to the cap on the debt service ratio.

How top 5 marquesfared.  The month of January did notgo too well for most  auto players. WhilePerodua continued to retain pole position, sales  were down 11% y-o-y, although  stillfar better than Proton, Toyota, Nissan and Honda, which saw sales plunging by28% / 23% / 28% / 89% y-o-y respectively. That said,  Perodua numbers may besomewhat misleading since January 2011 came off from a low base given that mostpotential Myvi buyers held back on their purchases in anticipation of the newMyvi,which was unfortunately delayed when the tsunami hit Japan.

Preview of NAP. Afew days ago, the media reported that the Government is considering reopeningthe 1.8-liter vehicle segment. To put things in perspective, the restrictionson foreigners with 100% ownership setting up manufacturing plants was lifted inthe last NAP in 2009, but this was confined to production of vehicles pricedabove RM150,000. We do not rule out the possibility of the  Government relaxing the price criteria, whichmay pave the way for the entry of VW in a bigger way and tap into the massmarket, as well as other automakers. We understand that currently the Government,together with consultants and industry players, is reviewing key aspectspertaining to the sector in its efforts to drive investment in the manufactureof hybrids and electric vehicles and gradually phase out Approved Permits(AP).  The revised NAP is due to be announcedin the next two months.

Maintain UNDERWEIGHT.We retain our TIV growth forecast of 1.1% for 2012 as it would be too prematureto make any drastic changes in  estimatesin  the first month of the year. Wemaintain our bearish view on autos and continue to advocate taking positions infundamentally undervalued autoparts stocks with potential earnings upside whichmay win new contracts  as car makers aimfor  higher localization. For autoparts,we have  a  BUY call on EPMB (FV: RM1.38), which we  feel will benefit from the rationalization of Proton's vendors after thetakeover by DRB-HICOM (NOT RATED) given the latter's status as reliable tier-1suppliers. However, no automakers warrant our BUY call, with UMW (AF:RM6.18) and Tan Chong (FV: RM4.00) remaining as SELLs. We have a NEUTRAL onProton following its proposed takeover by DRB-HICOM. 

Downgrade MBM and Delloyd.The share prices of most of the autoparts makers under our coverage have ralliedstrongly since the proposal to take over Proton on speculation that moretakeovers will emerge. We are downgrading MBM to a SELL, with our FV unchangedat RM3.69, despite two  contrasting  rumors that the company may be the subject ofa takeover by either Proton or UMW, and also a potential rights issue to fund  its acquisition of Hirotako. We are alsodowngrading Delloyd Ventures to NEUTRAL, with our FV unchanged at RM3.88, giventhe limited upside to its share price. EPMB  is our only  BUY among stocks in  our auto coverage.

Source: OSK188

EP Manufacturing beating full-year estimates

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

EP Manufacturing Bhd
(Nov 23, 78 sen)
Maintain buy at 76.5 sen with fair value of RM1.38: EPMB's earnings for 9MFY11 of RM29.8 million surpassed our full-year estimate of RM31.6 million. Earnings for 9MFY11 surged 77.6% due to greater economies of scale despite a 10.3% drop in revenue. The lower revenue was due to the disruption in auto parts supply in Japan, which led to a few months' delay in launching the new Myvi in 1H11. However, on a quarterly basis, EPMB's earnings weakened due to the effects of slowing production during the Ramadan period coupled by amendments to the Hire Purchase Act, which resulted in delays in delivering vehicles at the time.

Owing to the economies of scale achieved, EPMB's thin margins in the past are now on track to widen, thanks to the full-year output of the Perodua Myvi come 2012. This resulted in profit before tax margin year-to-date nudging up by 1.58 percentage points to 6.8%, which we think should move up and match its peers.

EPMB's revenue is expected to grow further as the company secures more localisation jobs and recognises the full-year revenue impact from the Myvi. On top of manufacturing components for Proton's Persona replacement, we also understand that the company is pushing to localise some components for UMW, as it currently supplies to Saudi Arabia's biggest Toyota distributor.

We upgrade our earnings forecasts for FY11 by 15% but leave our FY12 and FY13 numbers unchanged. With our valuation already pegged at five times FY12 earnings since early 2H11, we maintain our 'buy' call on the counter, with our fair value of RM1.38 retained. ' OSK Research, Nov 23


This article appeared in The Edge Financial Daily, November 24, 2011.

Going Strong

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: TA

Price Call: BUY

Target Price: 1.03

Automotive not in the fast lane yet

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

Automotive sector
Maintain neutral: We expect next year's total industry volume (TIV) to grow by 1.1% on the back of forecast GDP growth of 5.2%. Although the linear correlation between TIV and GDP growth is strong, we think the former's growth upside will be marginal because: (i) the replacement cycle for new vehicles that may give sales a boost has peaked; (ii) the upcoming models may not create enough excitement to sufficiently spur TIV growth; and (iii) consumer sentiment is deteriorating and buyers have become more frugal, which inevitably curtails spending on big ticket items.

We understand the government, together with consultants and industry players, is reviewing key aspects and policies pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).

The extension of the deadline for full exemption of excise duties and tax on hybrids and various incentives relating to the replacement of taxis are positive to the sector. However, Budget 2012's proposals could also potentially cap the upside on vehicle sales. The move to raise the price ceiling under the My First Home Scheme may lead to potential vehicle buyers putting a priority on owning a property over replacing their vehicles out of fear of rising property prices .

We still think there is more downside on some counters as their valuations have yet to see any significant price multiple compression. We also highlight the high risk of 2H earnings falling short of consensus expectations given the weakening ringgit, as well as high promotion expenses jacking up costs. The reversal in the ringgit (against the US dollar notably) has taken auto manufacturers by surprise as many had expected the ringgit to sustain its strong momentum.

With TIV remaining lacklustre, we think the sector will lack spark for a while. We are still firmly bearish on the larger caps, on which we have 'sell' calls, although we favour the small-cap autoparts makers in view of their beaten down valuations. Our top pick is EP Manufacturing Bhd (fair value: RM1.38) and Delloyd Ventures Bhd (FV: RM3.88). We maintain our 'neutral' stance on the sector. ' OSK Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.