Stock Name: EPMB
Company Name: EP MANUFACTURING BHD
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
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