EP Manufacturing Bhd (EPMB), an investment holding company, is an automotive parts manufacturer. The group operates through three segments: automotive, composite and water meters. The automotive and composite segments operate in Malaysia, and the company operates research and development (R&D) activities in Australia. The automotive segment manufactures, assembles and sell automotive parts. The segment manufactures modular components including intake air fuel module, fuel tank, corner module, parking brake assembly, duplex actuation system, rear combination lamp and head lamp; metal and suspension parts including chassis and body parts, sub-frame, front deck, cross-member, door inner front, dash panel, trailing arm and muffler; and plastic components including lamp, bumper, fuel railassembly and rear spoiler.
The composite segment is involved in the manufacture, assembly and sale of EP-X carbon composite bicycles and bicycles components. The water meters segment is engaged in the manufacture, assembly and sale of water meters. EPMB manufactures a range of products for both domestic and international automotive original equipment manufacturers (OEMs), including Proton, Perodua, Toyota, TRW, Honda and Suzuki. The group's subsidiaries include: EP Polymers (M), EP Moulds & Dies (M), EP Metering Services (M), Fundwin, EPMB (Australia) and Circle Ring Network.
OSK: EP Manufacturing had recently secured a new contract from Perodua for the manufacture of the cross member structure (a structure that holds the engine) for both the Myvi and Alza after investing over RM40m-60m in dies, moulds and R&D. Previously EPMB had only secured Perodua’s localization programme for the Viva’s cross member, from which it collects an estimated RM700-800 per car, along with the other parts it supplies.
The further localization of the Myvi and Alza would see EPMB increasing the supply of auto-parts to both models from 33 parts to 103 parts in total, almost tripling its revenue collected per Myvi from 2010 onwards. We estimate that revenue contribution from Perodua would increase from RM74m (as collected in FY08) to as much as RM196m in FY10 on the back of the higher average revenue per Perodua vehicle supplied (from RM477 in FY09 to RM1115 per vehicle). The growing revenue from Perodua will increase its proportionate share of EPMB’s total revenue from 15%-17% in FY08-09 to over 35% from FY10 onwards.
EPMB’s relationship with Proton remains intact given its long-standing relationship as a critical tier 1 auto supplier for Proton’s IAFM (Internal Air Fuel Module), which is used alongside the Campro engines. Also worth noting is that EPMB has contributed in enhancing the overall performance of the engineering performance of the IAFM. Furthermore, Proton also owns a minority stake of about 4% in a JV with EPMB under the company name of PEPS-JV, which further solidifies the relationship between the two companies. Furthermore, cost cutting measures going forward will also be reflected by the reduction in interest expense as EPMB pares down its debt level further of which management is targeting its net gearing ratio to hover at 50-55% by FY11. According to its debt schedule, EPMB is expected to pay off RM61m over the next 1 year. EPMB’s net gearing effectively trimmed to 88% and 72% for FY10-11. EPMB will likely continue to enjoy a zero effective tax rate given its unutilized high reinvestment allowance.
EPMB’s management is optimistic on Perodua’s recently launched Alza, for which management said the demand has been encouraging as the booking period is stretched as far as 4 months. While there have been concerns over the potential cannibalization on Myvi sales, the impact will not be severe as vehicle sales for the Myvi have remained uninterrupted to date despite the recent launch of the Alza. Perodua anticipates that bookings could average well above 4000 units per month for FY10, beating Exora’s monthly average sales to date since its launch earlier this year.
I generally would shy away from companies whose business model is structured around subsidised industries. However, considering the state of markets and significant broadening in revenue base, its a good mid term trade. Its a pretty straight forward buy owing to the new localization programmes by the government, which in turn boosted EPMB's fortunes for the Myvi and Alza which the company recently secured. Net profit for 2009 was RM6.5m on revenue of RM442.9m. The new contracts secured will jump revenue for 2010 to over RM560m and nearly double the net profit to RM12m. The net EPS will jump from 3.9 sen to 7.4 sen. I don't have to go into PER talk, you can do the math. Its 52 week high was 60 sen, which is my immediate target, I think 70 sen over this quarter is achievable.
Bloomberg Ticker: EPMB MK
Share Capital: 166m
Market Cap: RM73m
52 week H│L Price (RM) 0.60 - 0.12
Major Shareholders (%)
Mutual Concept 37.21
DBS Asset Management 7.01
Abdullah Bin Hamid 5.09
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p/s photo: Saaya Irie