EP Manufacturing- Running Out of Time

EPMB’s 1H earnings came in weaker at RM15.7m, on the back of lower revenue due to deteriorating sales from Proton. However, with Proton ramping up sales amid declining inventory pile coupled with seasonal festivals in 2H, we expect a better performance from EPMB in 2H. Meanwhile, the company has requested for a time extension for the Maju Expressway (MEX) acquisition as it has yet to receive the Government’s approval. We maintain our TRADING BUY and FV of RM0.94, which is based on a sum-of-the-parts valuation.

Hit by Proton, but results in line. EPMB’s 1H earnings of RM15.7m were weaker by 38% y-o-y (-19% q-o-q and -21% YTD) on the back of lower revenue as a result of deteriorating sales from Proton. Production came in weaker during the period, following the stringent lending guidelines implemented early this year. As 1H’s earnings accounted for 46% of our full year forecast for EPMB, we deem results to be in line with our estimate. Note that we have incorporated a substantial interest cost to finance the MEX acquisition. As such, we are estimating a profit of RM33m from just its auto division, which, after factoring in the interest cost, will result in a net profit of RM15.2m
for the group in FY12 

A better 2H. With Proton ramping up sales amid declining inventory pile coupled with seasonal festivals in 2H, we anticipate a better performance for EPMB then. Revenue from its water division is also growing at an encouraging pace, up 60% YTD, as its
bottomline losses have narrowed substantially from RM2.3m to RM0.6m. The higher volume will ultimately improve overall efficiency and consequently, its bottomline.

MEX acquisition still pending. EPMB has requested for a time extension to fulfill the conditions precedent of the Acquisition Agreement and is currently in the midst of negotiating with MEX concessionaire Maju Expressway SB to finalise the extension to the cut-off date. It remains to be seen whether the Government will approve the controversial deal given the commercial sensitivity and public flak.

Maintain TRADING BUY. Our FV of RM0.94 is based on the sum-of-parts method as illustrated below.

Source: OSK