EPMB has entered into an acquisition agreement with Maju
Holdings to acquire the MEX for RM1.15bn, which including assuming debts
totaling RM550m, values the deal at RM1.7bn. Although traffic growth is
expected 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 proposed
acquisition of Maju Expressway (MEX). EP Manufacturing announced that it
has entered into an acquisition agreement for the proposed acquisition of MEX
for RM1.15bn, which including debt totaling RM550m, values the deal
at RM1.7bn. The purchase will be mostly funded by borrowings totaling
RM1.575bn, with the remaining portion to
be funded by internal cash. Using
the privatization of PLUS for
which EV/EBITDA was used as a valuation yardstick, we deem the deal’s valuation
on the high side. The acquisition’s
EV/FY13 EBITDA of 14x represents a 55% premium versus the valuation for PLUS.
While the valuation is somewhat high, management has guided that IRR will
be around 17%, which we reckon may
somewhat compensate for the higher valuation versus PLUS’ IRR of 14%. At
13x EV/EBITDA, the payback period may stretch to 16 years, which is positively
shorter than the concession’s remaining 21 years.
Resilient traffic
growth. Since commencing operation in 2008, traffic on MEX has grown by a
CAGR of 21% from a daily traffic of 51,073 to approximately 90,000 in 2011. The
growth is attributed to: i) to the increasing population in Putrajaya and
Cyberjaya, ii) the preferred route for travel
to these 2 areas since the
highway cuts through highly populated
townships and fast developing areas, and iii) it is the preferred route to
KLIA, riding on the growth of air travel, notably the low cost carrier segment.
High interest to cost
hits earnings; downgrade to NEUTRAL. We estimate a decline in profits for
FY12 (by 36%) due to higher interest expenses although earnings for FY13 and
FY14 earnings will subsequently improve. The
company’s expanded share base (including
50m shares from the issuance of new securities) will dilute its EPS by 8-22% despite
the higher profits anticipated for FY13. As the acquisition cost will be heavily
funded by debt, EPMB will see its net interest expenses soar from RM11.4m in
FY11 to RM24m per annum. This would cause its net gearing of 33.2% in FY11 to
bloat to 457% in FY12. Thus we downgrade
EPMB to a NEUTRAL from BUY, with our fair value slashed from RM1.38 to RM1.15.
Source: OSK188
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