EP Manufacturing: Still Uncertain Over MEX

EPMB posted lower earnings of RM6.8m in 3Q on the back of a lower topline due to decreased production of Proton and Perodua vehicles. However, its earnings trumped our full-year forecasts, as we had factored in a substantial interest cost to fund the MEX acquisition, which has yet to be approved by the Government. Due to the uncertainty of the MEX acquisition, we are leaving our earnings unchanged. Nonetheless, we still deem the stock undervalued. Maintain TRADING BUY at an unchanged FV of RM0.94.

Hit by lower production from Proton and Perodua. EPMB posted earnings of RM6.8m for 3Q, down by 31% y-o-y and 2% q-o-q. The lower earnings were attributed to the lower topline, which dropped by 11% y-o-y, due to the lower production of Proton and Perodua vehicles. Nonetheless, the company’s earnings of RM22.6m for 9MFY12 (YTD: -24%) trumped our full-year estimates as we had earlier assumed that the MEX acquisition would take place sometime in 2H, and we had thus forecasted that earnings would be dragged down by a jump in interest costs to fund the acquisition.

MEX acquisition uncertain. EPMB’s controversial proposal to acquire the MEX highway was announced back in 1Q, but has yet to be granted approval from the Government. It remains to be seen whether the acquisition will go through, but we are assuming for now that it will, as the intention to acquire MEX is still firm.

Forecasts under review. We are putting our earnings projections under review, with an upside bias to FY12 numbers. There is still a lot of uncertainty whether the proposed acquisition would go through as this would drastically change the business scope of EPMB. While there is an upside forecast to our FY12 numbers, assuming the acquisition goes through, our FY13 numbers are likely to be maintained due to the high interest cost to fund the acquisition.

Maintain TRADING BUY.  Whether or not the acquisition comes through, EPMB is still currently trading at a compelling valuation. While our earnings are left unchanged, we still deem the stock to be undervalued. Maintain TRADING BUY at an unchanged FV of RM0.94 based on a sum-of-parts valuation which factors in the acquisition of the MEX highway.

Figure 1: EPMB's sum-of-parts valuation

FV of EPMB at a lower PE of 4x from 5x due to risk based on FY12 EPS (m) 81.77 DCF value of MEX (WACC of 11.1%) 1613.06 Net Debt (m) -1502.68 Equity Value of EPMB (m) 192.16 Number of shares issued (m) (diluted share base from 50m new shares) 204.42 FV per share (RM) 0.94 Source: Company Data

FYE Dec (RMm)	FY10	FY11	FY12f	FY13f	FY14f
Revenue	587.5	577.1	698.9	835.5	890.6
Net Profit	25.7	39.4	15.2	20.4	32.4
% chg y-o-y	-35.3	53.3	-61.3	34.1	58.7
Consensus			26.1	30.3	32.4
EPS	12.6	19.3	7.5	10	15.9
DPS	2	2	0	2	2
Dividend yield (%)	2.5	2.5	0.0	2.5	2.5
ROE (%)	10.6	13.8	4.5	5.7	8.4
ROA (%)	4.4	6.9	0.6	0.9	1.5
PER (x)	6.2	4.1	10.5	7.9	4.9
BV/share	1.2	1.3	1.5	1.8	2
P/BV (x)	0.7	0.6	0.5	0.4	0.4
EV/EBITDA (x)	2.1	1.7	9.8	10.8	9.2

Results Table (RMm)

	3QFY11	2QFY12	3QFY11	Q-o-Q	Y-o-Y	1HFY11	1HFY12	YTD
Revenue	142.2	124.6	127.0	2%	-11%	408.2	389.4	-5%
Operating expenses	-114.4	-103.8	-110.5	6%	-3%	-325.2	-324.0	0%
Other income	1.4	1.3	1.6	21%	15%	3.0	5.8	94%
EBITDA	29.1	22.1	18.2	-18%	-38%	86.0	71.2	-17%
Depreciation and amortization	-18.7	-11.8	-8.2	-31%	-56%	-50.7	-37.9	-25%
Operating income	10.4	10.3	10.0	-3%	-4%	35.3	33.2	-6%
Finance costs	-3.0	-2.4	-2.8	17%	-4%	-7.9	-7.8	-2%
Interest income	0.2	0.1	0.3	138%	58%	0.5	0.5	-1%
Net finance costs	-2.8	-2.3	-2.5	11%	-8%	-7.5	-7.3	-3%
PBT	7.6	8.0	7.4	-7%	-3%	27.8	26.0	-7%
Tax	2.3	-0.9	-0.6	-40%	-124%	2.0	-3.3	-264%
PAT	10.0	7.1	6.9	-3%	-31%	29.8	22.7	-24%
MI	0.0	0.0	0.0	-45%		0.0	-0.1
PATAMI	10.0	7.0	6.8	-2%	-31%	29.8	22.6	-24%
EPS	6.0	4.2	4.1	-2%	-31%	18.0	13.6	-24%
DPS	1	0	1
EBITDA Margin	20.5	17.8	14.3	-4.7	-3.5	21.1	18.3	-2.8
PATAMI Margin	7.0	5.6	5.4	-0.7	-2.4	7.3	5.8	-1.5
NTA per Share (RM)	0.98	1.30	1.33			0.98	1.33

EARNINGS FORECAST

FYE Dec (RMm)	FY10	FY11	FY12f	FY13f	FY14f
Revenue	587.5	577.1	698.9	835.5	890.6
EBIT	38	41	60.1	122	136.7
PBT	32.5	29.6	18	24.2	43.3
EI	-	1.3	-	-	-
Net Profit	25.7	38.1	15.2	20.4	32.4
Core Net Income	25.7	39.4	15.2	20.4	32.4
EPS (sen)	12.6	19.3	7.5	10	15.9
DPS (sen)	2	2	0	2	2
Margin
EBIT	6.50%	7.10%	8.60%	14.60%	15.40%
PBT	5.50%	5.10%	2.60%	2.90%	4.90%
Core Net Profit	4.40%	6.80%	2.20%	2.40%	3.60%
ROE	10.60%	13.80%	4.50%	5.70%	8.40%
ROA	4.40%	6.90%	0.60%	0.90%	1.50%
Balance Sheet
Fixed Asset	405.6	356.1	2011.4	1941.1	1870.8
Current Asset	180.3	194.2	338.3	302.2	322.7
Total Assets	585.8	550.3	2349.7	2243.3	2193.5
Current Liabilities	241.8	201	379.4	342.9	347.2
Net current liabilities	-61.6	-6.8	-41.1	-40.7	-24.5
LT Liabilities	80.5	73.8	1629.5	1543.2	1460.8
Shareholder's funds	243.5	275.5	340.7	357.1	385.5
Net Gearing	64%	33%	435%	416%	360%

Source: OSK