Monday 19 March 2012

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


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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