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TA SecuritiesA Member of the TA Group
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603‐20721277 / FAX: +603‐20325048
INITIATING COVERAGE
FBM KLCI: 1,558.17
EP Manufacturing Berhad Thursday,July 28, 2011
Strategic Tier1 Vendor TP: RM1.16 (+17%)
Business Summary : Supplier of modular assemblies, safety and critical components and smart water meter systems.
Major Shareholders (%) : Mutual Concept Sdn Bhd (38.63%) : Hamidon Bin Abdullah (5.28%) Recommendation: Buy
Company Website : www.epmb.com.my Market Capitalisation (RMmn): RM164.3
IR Contact : ZJ Advisory Sdn Bhd (603 2032 2328) Current Price: RM0.99
Market/ Sector: Main / Industrial Products
Stock Code: 7773
TA Research Team Coverage [email protected] +60320721277 ext:1634
Key Stock Statistics
FYE December 2011E 2012F
EPS (sen) 16.8 19.3
PER (x) 5.4 4.7
Gross div/ share (sen) 3.0 3.0
NTA/share (RM) 1.0 1.2
Book value/ share (RM) 1.6 1.8
Issued capital (mn shares) 166.0 166.0
52 weeks share price range (RM)
Per Share Data
FYE December 2009 2010 2011E 2012F
Book Value (RM) 1.4 1.5 1.6 1.8
Cash Flow (sen) 2.9 15.9 22.3 31.6
Earnings (sen) 4.1 15.7 16.8 19.3
Dividend (sen) 1.0 3.0 3.0 3.0
Payout Ratio 0.2 0.2 0.2 0.2
PER (x) (x) 23.9 6.3 5.4 4.7
P/ Cash Flow (x) 2.9 15.9 22.3 31.6
P/ Book Value (x) 0.7 0.7 0.6 0.5
Dividend Yield (%) 1.0 3.0 3.0 3.0
ROE (%) 3.2 11.2 10.9 11.4
Net Gearing (%) 1.0 0.6 0.5 0.3
P&L Analysis (RM mil)
FYE December 2009 2010 2011E 2012F
Revenue 468.0 587.5 515.1 574.8
Operating Profit 72.8 124.7 128.3 133.9
Depreciation ‐50.2 ‐74.9 ‐79.1 ‐82.4
Interest Expenses ‐14.1 ‐10.6 ‐10.5 ‐9.3
Pre‐tax Profit ‐0.1 32.5 29.9 34.0
Effective Tax Rate (%) >100.0 19.6 6.7 5.9
Net Profit 6.9 26.1 27.9 32.0
Operating Margin (%) 15.0 25.8 24.9 23.3
Pre‐tax Margin (%) 0.0 5.5 5.8 5.9
Net‐Margin (%) 1.5 4.4 5.4 5.6
Balance Sheet (RM'mn)
FYE December 2009 2010 2011E 2012F
Non‐Current Assets 445.3 405.6 400.6 394.0
Current Assets 127.4 160.3 175.0 195.8
Total Assets 572.7 565.8 575.6 589.8
Non‐Current Liabil ities 102.7 80.5 70.5 60.5
Current Liabil ities 243.1 241.8 237.5 233.4
Share capital 166.0 166.0 166.0 166.0
Shareholders Funds 226.9 243.5 267.6 295.9
1.13/0.485
Share Price relative to the FBM KLCI
Source: Bloomberg
We initiate coverage on EP Manufacturing Berhad (“EPMB”) with a BUY conviction. We term EPMB as a contract manufacturer for Proton and Perodua as it is a leading tier1 vendor of critical and safety components to the two biggest national car manufacturers. We value EPMB at RM1.16 based on 6x FY12 EPS of 19.3sen. This translates to an upside potential of 17% based on its closing price of RM0.99/share. 1 Investment Case 1.1 Supplier of modular assemblies, safety and critical
chasis and body components to Proton and Perodua
1.2 Moving up the value chain – Key to sustain the relationship with Proton and Perodua
1.3 Prospect of the two biggest national car manufacturers, Proton and Perodua.
1.1 Supplier of modular assemblies, safety and critical
chasis and body components to Proton and Perodua
EPMB has been supplying car parts to Proton and Perodua since 1994 and 1999 respectively. To minimise possible supply disruption, EPMB has invested sizeable amounts of capital into plants and machineries to ensure sufficient capacity to meet the demand. We believe this would act as a deterrent to new entrants from entering the fray due to the high barrier of entry set by this circumstance. To reimburse this high investment, the automakers will impose a temporary cost plus amortization pricing scheme whereby the sales of every car set will incorporate the amortization of toolings and dies. This scheme would last for several years until EPMB reclaims its investment as these tooling and dies are car specific. Each car model would have its own variant of tooling and dies. When the scheme lapsed, the selling price per car set would revert to the original price agreed between the two parties. The whole production and pricing mechanism ensure a win‐win situation for EMPB and automakers.
TA SecuritiesA Member of the TA Group 28/07/11
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Steel, a significant raw material in EPMB’s production process, is sourced from steel suppliers in Japan and Korea. The group leverages on Proton and Perodua’s greater bargaining power with overseas steel suppliers for the procurement of steel at reasonable prices. Proton and Perodua will negotiate the bulk purchase of steel with the overseas steel suppliers on behalf of EPMB and the other auto parts manufacturers. Negotiated steel prices with the overseas steel suppliers are reviewed on a quarterly basis and in the event of any rapid increase in steel prices, the price increase will be reimbursed back to EPMB by Proton and Perodua. Hence, EPMB is not exposed to any rapid fluctuations in steel prices. Furthermore, the whole production process and inventory system require EPMB to carry minimal amount of raw materials, providing some flexibility to cash management. EPMB only stocks up the steel requirements to one‐day of operation due to the close proximity of steel suppliers’ plants. After processing the raw material into different car sets, the finished products will be shipped to Proton and Perodua’s neighbouring plants everyday as semi‐finished products for their assembly process. Due to the short distance between EPMB’s manufacturing plant and the latter, EPMB is also able to reduce its logistic cost to the minimum as the turnaround time is short. In its present state, EPMB’s manufacturing plant in Batang Kali does not cover the entire land bank of 22.6 acres. The vacant land bank of 6.6 acres can be earmarked for future development and expansion when EPMB has reached its maximum production capacity. Currently, EPMB is operating at 70‐80% of its total production capacity. 1.2 Moving up the value chain – Key to sustain the
relationship with Proton and Perodua EPMB is expected to gain economies of scale due to the possibility of carrying over some common sets of components like fuel tank into various car models. This allows the group to spread its cost of investment over several car models and recoup the investment within a shorter time frame. However, all this cannot be done without the trust from the two automakers to outsource the parts supply to EPMB. As such, it is imperative for the company to maintain its favourable relationship with Proton and Perodua. To do this, the company has been striving to produce new products, which fit into Proton and Perodua’s requirement. For instance, the company created the Integrated Air Fuel Module (“IAFM”) which is now being used in every Campro engine produced by Proton. Given the group’s endeavour to move up the value chain, we believe EPMB’s position is less intimidating and the company would continue to play an important role in the production process of Proton and Perodua’s vehicles.
To keep abreast with the new technology in the automotive sector, the company established a strategic partnership with Bosch, the world’s no.1 supplier to Original Equipment Manufacturer (“OEM”) for various technology items as well as Koito, the world’s largest lamp maker. These technical tie‐ups and continuous R&D with these partners would provide the much needed technology knowhow to EPMB and also created international standard practices in EPMB. EPMB’s plants are strategically located near Proton and Perodua’s plants in Batang Kali and Shah Alam to accommodate to the two automakers’ JIT inventory system. Also, this will provide cost savings to EPMB in terms of fuel and logistic expenses. All in, we see slim chances that Proton and Perodua will move away from EPMB as the latter has always been “value‐add” to the production of Proton and Perodua. 1.3 Prospect of the two biggest national car
manufacturers, Proton and Perodua. Sales to Proton and Perodua collectively contributed > 70% to the group’s total revenue from 2007 to 2010 (see Figure 1). As such, the sales of Proton and Perodua cars are important factors to determine the profitability of EPMB. For 2011, we expect TIV to drop by 2% due to certain hiccups such as supply disruptions from Japan due to the recent earthquake and tsunami in Japan as well as the amended Hire Purchase Act (“HPA”) 1967. However, moving forward, we expect car sales to pick up by 1% in 2012 and 2013 (See Figure 5). As far as Proton and Perodua’s car sales are concerned, we expect Perodua’s car sales to increase significantly next year following the success of the new Myvi launch in mid‐June this year. Based on our in‐house forecasts, we project Perodua’s car sales to increase by 21% YoY given the overwhelming response to the new Myvi model. Our channel check indicates that Perodua has received bookings of 19,000 units of Myvi. For Proton, our automotive analyst projects car sales to increase by 3.8% as the new Persona Replacement model is target for launch next year. The estimated strong growth in car sales augurs well for EPMB as this would translate into higher sales of car components from EPMB to Proton and Perodua. Besides that, both Proton and Perodua have begun implementing the localisation programme. Under this programme both car manufacturers strive to have high local contents for its productions. The outcome of this programme can be seen in the new Myvi replacement model. For the new Myvi replacement model, the revenue per car set has increased four times due to additional parts supply compared to the old Myvi.
TA SecuritiesA Member of the TA Group 28/07/11
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Figure 1: Revenue Breakdown by Customers (%)
(Source: Company, TA Securities) 2 Investment Risk From our perspective, we view EPMB to be in a very strategic business position. However, we also acknowledge that the dependency on the two main car manufacturers may pose a threat should the barrier of entry be breached by new suppliers who manage to offer the same products as EPMB. If either Proton or Perodua decide to switch to another manufacturer, this would have a great detrimental effect on EPMB. 3 Company Background EPMB is an investment holding company. The company, through its subsidiaries, concentrates on two lines of businesses namely the automotive division and the water division, where the company is involved in the manufacture, assembly and sale of automotive parts and water meters, respectively. (See Figure 2 and 3) Established in 1989, EPMB has two manufacturing facilities located in Shah Alam and Batang Kali with built up areas of 16,000 sq ft and 428,000 sq ft respectively. The Shah Alam’s plant concentrates on manufacturing plastic engineering auto parts as well as water meters whereas the latter manufactures metal auto parts. Both facilities are strategically located to service Proton and Perodua, who are EPMB’s main customers. This leads to savings on logistic cost as well as facilitates Just‐In‐Time (“JIT) delivery. Under the water division, a pilot project in Kedah has been completed for the installation of smart meters and electro‐magnet flow meters with automatic meter reading (“AMR”) capabilities. In another case, EPMB also has a water treatment project in Serang City, Indonesia. Under phase 1 of this project, EPMB will work closely with the relevant authorities to construct a water facility with the capacity to dispense 25 litres/second of clean water via a network of pipes to 2,500 households within the vicinity of Desa Dalung. Upon the completion of phase 1, the next phase will concentrate on supplying up to 600 litres/second of clean water to 50,000 households in Serang City. The water division is barely breakeven at this juncture.
Figure 2: Corporate Structure
(Source: Company, TA Securities)
Figure 3: Key Products
(Source: Company, TA Securities)
TA SecuritiesA Member of the TA Group 28/07/11
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4 Board of Directors 4.1 Hamidon Bin Abdullah Executive Chairman and founding member Obtained Degree in Applied Mathematics &
Computer Science in 1974 and a Master’s Degree in Urban Planning in 1975 from University of Adelaide, Australia.
Currently a Director of Atis Corporation Berhad and the Executive Chairman of Nadayu Properties Berhad (formerly known as “Mutiara Goodyear Development Berhad”).
4.2 Dato’ Seri Ismail Bin Shahudin Independent Non‐Executive Director Holds a Bachelor of Economics (Honours) degree
from University Malaya, majoring in Business Administration.
Currently served on the Board of SMPC Corporation Berhad, Nadayu Properties Berhad (formerly known as “Mutiara Goodyear Development Berhad”), Malayan Banking Berhad, Plus Expressway Berhad, UEM Group Berhad and Aseana Properties Limited, a company listed on the London Stock Exchange.
4.3 Dato’ Ikmal Hijaz Hashim Independent Non‐Executive Director Holds a Master of Philosophy (Land Management)
from University of Reading, U.K., and Bachelor of Arts (Honours) from Universiti Malaya.
Hold directorships in other public companies which include Faber Group Berhad, UEM Land Holdings Berhad and Nadayu Properties Berhad (formerly known as “Mutiara Goodyear Development Berhad”).
4.4 Shaari Bin Haron Independent Non‐Executive Director Obtained Bachelor of Law (Honours) Degree from
the Internaional Islamic University. Currently Managing Partner of Messrs Abu Bakar
& Yong. Also sits on the board of Voir Holdings Berhad. 4.5 Hew Voon Foo Non‐Independent Non‐Executive Director Member of the Chartered Institute of Management
Accountants (CIMA) and the Malaysian Institute of Accountants (MIA)
Currently served on the board of Genetec Technology Berhad and Atis Corporation Berhad.
4.6 Dr. Linden Hamidon Non‐Independent Non‐Executive Director Holds Bachelor of Dental Surgery from the
University of Adelaide, Australia. 5 Financial Review EPMB has managed to increase its topline from RM468mn in FY09 to RM587.5mn in FY10. This increase has led to a jump in bottomline from RM7.9mn in FY09 to RM26.1mn or 230% increase YoY in FY10 (See Figure 4). This growth was mainly due to the increase in TIV in Malaysia. For 1Q11, EPMB reported a higher net profit of RM8.6mn (vs. 1Q10’s RM4.2mn) despite lower revenue. This was mainly due to higher operating efficiency that enhanced profit margin.
Figure 4: Profit attributable to Equity Holders (RM’mn)
‐5
0
5
10
15
20
25
30
2007 2008 2009 2010
(Source: Company, TA Securities)
6 Industry Landscape / overview Automotive Industry The car industry is dominated by Proton and Perodua with Myvi and Saga representing the best and 2nd best selling models. Both the manufacturers have a combined market share of 57%. In 2010, Total‐Industry‐Volume (TIV) was at a record high of 605,156 units due to economic expansion and lower HP rate. MAA and Frost & Sullivan project TIV to grow to 608,000 and 615,900 units respectively for 2011. However, TA Research projects TIV to contract 2% to 587,000 units due to 1) high‐base effect; and 2) supply disruptions following the recent earthquake and Tsunami in Japan. YTD‐June, TIV has contracted 1.3% as compared to a growth of 3.4% in May‐11. Figure 5: TIV
(Source: MAA, TA Securities) 7 Recent Development Following the March 11 earthquake and tsunami, Japan car manufacturers have taken a beating. Production of car parts was disrupted. Nevertheless, MAA projects car production to recover to the pre‐disaster level from August onwards. Sales of Perodua’s Myvi, its bestselling model, has been gloomy as the market was anticipating the new Myvi replacement model. Following the launch of new Myvi on 16 June, we expect Perodua to reclaim the fall in sales in 1H11. With the localisation programme with Perodua in place, the new Myvi has approximately 90% of local content, of which EPMB is one of the largest supplier of auto parts for this model.
TA SecuritiesA Member of the TA Group 28/07/11
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8 Earnings Outlook We expect the automotive division to remain the keyearnings contributor for FY11‐13. We expect EPMB’s FY11‐13 net profit to grow by 14% underpinned by revenue growth of 17%. Our earnings projections are based on the following assumptions: i) Rolling out of new models from time to time; ii) Expected increase in revenue per car set due to incorporation of more auto parts which is in line with the localisation programme being implemented; and iii) Projected increase in TIV for FY12 and FY13. 9 Dividend Policy EPMB does not have a formal dividend policy. The company has declared a gross dividend of 3 sen for FY10 which translate to a dividend yield of 3% based on the group’s share price of RM1.00. We believe the group will strive to maintain its dividend payout ratio for the years to come. 10 Valuation & Recommendation We choose to value EPMB by making comparison to its peers with forward PER estimations. Figure 6: Peer Comparison Table Company Name Share Price Market Cap FY12 EPS FY12 PER
(RM) (RM'mn) (sen) (x)
EP Manufacturing Berhad 0.99 164.3 19 6.0
New Hoong Fatt Holdings Berhad 2.32 174.4 46 5.0
Delloyd Ventures Berhad 3.58 351.4 64 5.6
APM automotive Holdings Berhad 4.90 987.8 74 6.7
Average (excluding EPMB) 3.60 504.5 61 5.8 (Source: Bloomberg)
New Hoong Fatt Holdings Berhad markets, distributes and trade automotive spare parts and accessories. It also operates in metal stamping and cathodic electro‐deposition painting services and manufactures and trades automotive body stamped parts. Delloyd Ventures Berhad manufactures, trades, retails and exports automotive and electronic automotive parts and accessories. The company, through its subsidiaries, also provides repair and maintenance service for motor vehicles, cultivates palm oil, manufactures and distributes agri‐chemicals, and manages a website portal. APM Automotive Holdings Berhad manufactures and distributes automotive parts and components including air‐conditions, electrical components, coil springs, metal component parts, PVC body side moulding, shock absorbers, tapered leaf springs, vehicle interior linings, seat radiators and other automotive parts. These companies were chosen for its similar business models with EPMB. More importantly, the profitability of these companies depends largely on Proton and Perodua’s car sales. Valuation wise, we value EPMB at RM1.16/share, based on 6x FY12 EPS of 19.3sen, which is a discount of 33% to our target PER of 9x for the automotive sector. We believe this is justifiable due to its smaller market capitalization as compared to car manufacturers. At 6x, this is also comparable to the auto parts manufacturer’s average PER for FY12 of 5.8x. Note that the group has been actively buying back its own shares from the market. YTD, a total of 1,712,800 shares had been bought back at prices ranging from RM0.53 to RM1.08. This indicates that EPMB is currently undervalued at least from their point of view. Given the upside potential of 17%, we recommend a Buy on EPMB.
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TA SecuritiesA Member of the TA Group 28/07/11
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Financial Summary (RM’mn) Income Statement (FYE December) 2009 2010 2011E 2012F 2013F
Revenue 468.0 587.5 515.1 574.8 601.7
Cost of sales (391.5) (489.4) (414.0) (458.3) (490.6)
Gross Profit 76.5 98.2 101.0 116.5 111.1
EBITDA 72.8 124.7 128.3 133.9 141.1
Depreciation (50.2) (74.9) (79.1) (82.4) (82.6)
Amortisation (8.6) (6.8) (8.9) (8.2) (7.5)
EBIT 14.0 43.0 40.3 43.3 51.0
Finance Cost (14.1) (10.6) (10.5) (9.3) (8.1)
Profit before tax (0.1) 32.5 29.9 34.0 42.9
Tax expense 7.9 (6.4) (2.0) (2.0) (10.7)
Profit attributable to
Equity holders 6.9 26.1 27.9 32.0 32.2
Minority interest 1.0 ‐ ‐ ‐ ‐
Cash Flow (FYE December) 2009 2010 2011E 2012F 2013F
PBT (0.1) 32.5 29.9 34.0 42.9
Depn & Amort 58.8 81.7 88.0 90.6 90.1
Others 46.5 11.4 10.5 9.3 8.1
PO/(L) before changes in WC 105.2 125.5 128.3 133.9 141.1
Changes in WC 3.7 (3.0) 1.5 0.5 0.5
Tax & Interest 0.7 (1.5) (2.0) (2.0) (10.7)
CFO 109.6 121.0 127.8 132.4 130.9
Capex (50.8) (48.1) (83.0) (84.0) (83.0)
Others 0.2 (9.0) ‐ ‐ ‐
CFI (50.6) (57.1) (83.0) (84.0) (83.0)
Net Addition/Repayment (48.8) (29.0) (20.0) (20.0) (20.0)
Dividend Paid ‐ (2.5) (3.7) (3.7) (3.7)
Others (14.5) (10.9) (10.5) (9.3) (8.1)
CFF (63.3) (42.4) (34.2) (33.0) (31.8)
Net Cash Change (4.2) 21.5 10.6 15.4 16.1
Balance Sheet (FYE December) 2009 2010 2011E 2012F 2013F
PPE 327.4 289.0 292.9 294.4 294.9
Intangible assets 112.6 111.1 102.2 94.1 86.5
Other 5.3 5.5 5.5 5.5 5.5
NCA 445.3 405.6 400.6 394.0 386.9
Inventories 28.5 36.7 36.7 37.8 38.9
Trade & other receivables 78.9 82.3 86.4 90.7 95.2
Others 3.1 3.1 3.1 3.1 3.1
Cash and cash equivalents 16.8 38.2 48.8 64.2 80.2
CA 127.4 160.3 175.0 195.8 217.5
Total Assets 572.7 565.8 575.6 589.8 604.4
Share capital 166.0 166.0 166.0 166.0 166.0
Reserves 54.9 77.5 101.7 129.9 158.4
Attributables to
Equity holders 220.9 243.5 267.6 295.9 324.3
Minority interests 6.0 ‐ ‐ ‐ ‐
Total Equity 226.9 243.5 267.6 295.9 324.3
Loans and borrowings 100.1 70.3 60.3 50.3 40.3
Deferred tax liabilities 2.6 10.2 10.2 10.2 10.2
NCL 102.7 80.5 70.5 60.5 50.5
Loans and borrowings 130.9 124.4 114.4 104.4 94.4
Others 5.0 4.9 4.9 4.9 4.9
Trade and other payables 107.3 112.5 118.1 124.0 130.3
CL 243.1 241.8 237.5 233.4 229.6
Total Liabilities 345.8 322.3 308.0 293.9 280.1
Total equity and liabilities 572.7 565.8 575.6 589.8 604.4
Ratios 2009 2010 2011E 2012F 2013F
EPS (sen) 4.1 15.7 16.8 19.3 19.4
PER (X) @ current share price 23.9 6.3 5.4 4.7 4.7
Gross Dividend (sen) 1.0 3.0 3.0 3.0 3.0
Dividend yield (%) 1.0 3.0 3.0 3.0 3.0
Gross margin (%) 16.4 16.7 19.6 20.3 18.5
EBITDA margin (%) 15.0 25.8 24.9 23.3 23.4
EBIT margin (%) 3.0 7.3 7.8 7.5 8.5
PBT margin(%) (0.0) 5.5 5.8 5.9 7.1
Equity Holder's profit margin (%) 1.5 4.4 5.4 5.6 5.3
Net Debt (RM'mn) 214.2 156.5 125.9 90.5 54.5
Net Gearing (x) 1.0 0.6 0.5 0.3 0.2
ROE (%) 3.2 11.2 10.9 11.4 10.4
ROA (%) 1.1 4.6 4.9 5.5 5.4
NTA (RM) 0.7 0.8 1.0 1.2 1.4
P/NTA(x) 1.5 1.3 0.9 0.7 0.6
Appendix I.I: Batang Kali Manufacturing Plant
(Source: Company, TA Securities)
TA SecuritiesA Member of the TA Group 28/07/11
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Appendix I.2: Batang Kali Manufacturing Plant
(Source: Company, TA Securities)
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Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have
an interest in the securities and/or companies mentioned herein.
This report has been prepared by TA SECURITIES HOLDINGS BERHAD for purposes of CMDFBursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and will be compensated to undertake the scheme. TA SECURITIES HOLDINGS BERHAD has produced this report independent of any
influence from the CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia’s website at:
http://www.bursamalaysia.com/website/bm/listed_companies/cmdf_bursa_research_scheme/eResearch.jsp
for TA SECURITIES HOLDINGS BERHAD(14948‐M)
(A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan – Head of Research
