PP10551/10/2010(025682)

01 September 2010

MALAYSIA EQUITY
Investment Research
Daily News
1HFY10 Results Review
Ahmad Maghfur Usman
+60 (3) 9207 7654
Ahmad.maghfurusman
@my.oskgroup.com
EP Manufacturing
Charging Up For the Second Half
BUY  EPMB’s annualized 1H core earnings appeared to fall short of our full-year estimates,
no thanks to the higher tax expenses incurred. Nonetheless, we deem results in line
Target RM0.82
Previous RM0.75 in anticipation of a stronger 2H as production will be boosted by the rush in Hari
Price RM0.51 Raya delivery, with additional volume to be contributed by the upcoming launch of
the Waja replacement. Cost-wise, we expect EPMB to see lower tax expenses from
AUTOPARTS the higher investment tax allowances going forward. As we roll over our valuations
EPMB is a leading tier 1 supplier of Proton to FY11 numbers, our TP moves up to RM0.82 (from RM0.75) with our BUY call
and Perodua vehicles
maintained.
Stock Statistics
Bloomberg Ticker EPMB MK In line with estimates. EPMB recorded a core net profit of RM1.86m on the back of
Share Capital (m) 166.0
revenue of RM157.31m for 2QFY10. 1HFY10 revenue was within our estimates,
Market Cap (RMm) 84.6
52 week H│L Price (RM) 0.64 0.30 representing 53% of our full-year forecasts. While the annualized 1HFY10 core net profit
3mth Avg Vol (‘000) 582.9 may seem to fall short of our forecast due to higher taxation and depreciation charges, we
YTD Returns 9.7
Beta (x) 1.23 consider EPMB’s bottom-line numbers to be within our forecast as we expect 2H to be a
stronger half on the back of higher margins.
Major Shareholders (%)
Mutual Concept 38.20
Benefiting from Perodua’s localization programme. In tandem with the higher TIV sales
Hamidon Bin Abdulloh 5.33
q-o-q, y-o-y and YTD, EPMB’s revenue rose 4.7% q-o-q and 38.5% YTD (33% y-o-y)
thanks to higher contribution from Perodua as EPMB benefitted from its localization
Share Performance (%) programme. This programme has effectively increased EPMB’s average revenue
Month Absolute Relative
1m -0.1 -6.2 contribution per Perodua from RM484 (in FY09) to an estimated RM1033 per unit for FY10.
3m 8.3 -0.9
6m 8.3 -6.1 Bottom-line hit by higher taxes. While its core net profit surged 118% y-o-y, the weaker
12m 65.0 40.3
q-o-q numbers (-55% q-o-q) were attributed to the higher tax expenses incurred due to the
6-month Share Price Performance impact of non tax-deductible expenses in the absence of any investment tax allowances
0.65 filed for the quarter (there was no capex spending for 1Q FY10 vs the 2QFY10 capex of
0.60 RM27m). We expect tax expenses to decline going forward due to its high capex spending.
0.55 During the quarter, EPMB also made exceptional gains totaling RM3.846m, comprising a
0.50
RM5.13m write-back (from the over-provisions last year on its intangible assets), which
0.45
also led to an additional tax expense of RM1.28m. As a better gauge of performance, its
core PBT shrank by 18.8% q-o-q (vs core net income q-o-q drop of 55%) although it was
0.40

0.35
significantly better compared to last year increasing by 193% YTD due to the higher
0.30
Mar-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 revenue base. The weaker q-o-q numbers were also caused by higher depreciation (noting
that its CFO increased from RM28.3m in 1QFY10 to RM59m YTD; YTDFY09: RM16m) as
its depreciation policy is based on units of activity method. The higher depreciation and
amortization have effectively reduced core PBT margins by 0.68ppts although YTD margins
have improved significantly by 1.41ppts due to better economies of scale achieved by its
production lines.

FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f

Turnover 483.7 468.0 578.0 630.7 683.6
Core Net Profit 4.3 12.8 16.2 19.4 26.7
% chg y-o-y NM 198.9 26.7 19.6 37.9
Core EPS (sen) 2.6 7.7 9.7 11.7 16.1
Gross DPS (sen) 0.0 1.0 2.0 2.0 2.0
Gross Dividend Yield (%) 0.0 2.0 3.9 3.9 3.9
ROE (%) 3.5 3.3 6.9 7.7 9.8
ROA (%) 1.2 1.3 2.8 3.5 4.9
PER (x) 19.8 6.6 5.2 4.4 3.2
NTA Per Share (sen) 40.8 65.3 72.0 86.4 99.3
P/NTA (x) 1.2 0.8 0.7 0.6 0.5
EV/EBITDA (x) 5.6 3.5 2.6 2.1 1.3

OSK Research | See important disclosures at the end of this report 1

 OSK Research

Results Table (RMm)

Q-o-Q YTD YTD Y-o-Y
FYE Dec 2Q10 1Q10 Comments
chg FY10 FY09 chg

Revenue 157.31 150.23 4.7% 307.54 221.98 38.5% In line. Revenue increased q-o-q and y-o-y, thanks to
higher contribution from Perodua
EBIT 7.28 7.46 -2.4% 14.74 10.36 42.2% EBIT down q-o-q due to the higher deprecation and
amortization incurred
Interest -3.65 -2.96 23.4% -6.60 -7.59 -13.1%
Expense
Interest Income 0.05 0.03 46.9% 0.08 0.03 172.4%
EI 3.85 0.00 NA 3.85 0.00 NA Exceptional gain of RM5.13m in write-backs, which also
resulted in an exceptional tax of RM1.28m
PBT 7.53 4.53 66.0% 12.06 2.80 330.5%
Core PBT 3.68 4.53 -18.8% 8.21 2.80 193.2%
Tax -1.64 -0.30 NM -1.94 0.00 NM Higher taxation as there was no investment tax
allowance since there was zero capex incurred in 1Q.
We expect lower taxes going forward as EPMB spent
over RM24m in capex during 2Q.
MI -0.18 -0.11 66.4% -0.29 -0.06 396.6%
Net Profit 5.70 4.12 38.3% 9.82 2.74 258.3%
Core Net Profit 1.86 4.12 -55.0% 5.98 2.74 118.0% Although annualized numbers fell short, we deem this in
line as we expect better margins from the lower tax
expense in 2H.
EPS (sen) 1.12 2.48 -55.0% 3.60 1.65 118.0%
DPS (sen) 1.00 0.00 NM 1.00 0.00 NA
EBIT margin 4.63 4.96 -0.34 4.79 4.67 0.12
(%)
PBT margin (%) 4.78 3.02 1.77 3.92 1.26 2.66
Core PBT 2.34 3.02 -0.68 2.67 1.26 1.41
Margin (%)
Net profit 3.62 2.74 0.88 3.19 1.24 1.96
margin (%)
NTA/ Share 0.70 0.69 1.7% 0.70 0.52 33.1%
(RM)
Net Gearing (x) 0.81 0.84 0.81 1.13

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OSK Research

Still leaking water, but losses minimizing substantially. On the water meter side, EPMB continues to
record losses although this has significantly improved compared to the corresponding half last year (YTD
operating losses lower by 32%) thanks to the improved operating efficiencies achieved as production
volume doubled.

Expanding into drinking water treatment in Indonesia. To recall, EPMB announced in early March
that it intends to establish a cooperation agreement with the Indonesian provincial government for the
proposed development of a drinking water supply treatment in Serang, Banten province, Indonesia. This
30 year concession project granted by the Serang government to EPMB’s 90% held Indonesian
subsidiary (of which the remainder is owned by the Serang government) will entail 2 phases with Phase
One to kick start sometime end of this year (as a pilot phase) for the supply of 70 liters/second (supplying
an estimated 15,000-20,000 households) and Phase 2 at a production output of 600 liters / second.
Phase 2 however will depend on the successfulness of the pilot project (Phase One) and so far no time-
line has been mentioned by management. Initial investment costs however will be minimal for the pilot
project whereby management has guided a range of RM10-15m (for a mobile water treatment facility)
over the next 1 year which will be funded by both debt and internal funds. Currently only 10% of the
Serang household population has access to clean drinking water. Management guided that contribution
will however be minimal over the pilot phase and according to Indonesian news reports, the Serang
government will also receive a 5% royalty fee of the revenue earned on top of the 10% profit share (from
the stake owned in EPMB’s Indonesian subsidiary). Pending further clarification from management we
have yet to factor this project into our earnings contribution as the feasibility study of the project have yet
to be finalized.

Expecting a better 2H. Management guided conservatively that it expects to stage a consistent
performance over the 2H as production numbers will be boosted by the rush in Hari Raya deliveries and
the additional volume will be contributed by the upcoming launching of the Waja replacement which will
be based on a 1.8 Campro engine, of which EPMB will be producing the Campro’s intake air fuel module
(IAFM). Looking forward into FY11, EPMB will see more contribution from Perodua once the new Myvi
replacement comes in sometime in June-July. Cost wise, margins for the 2H are expected to be boosted
by higher volume and tax incentives from the capital allowances and pioneer status from the higher
profitability contributed from its IAFM manufacturing division for Proton.

Net gearing continues to improve. Thanks to the higher revenue base contributed by Perodua’s
localization programme and its improving cash conversion cycle, EPMB’s net gearing has improved
significantly from 100% in end FY09 to 80% as of 2Q. We expect the higher revenue base going forward
will see its net gearing to trend lower to 62% by year end. Note that EPMB’s operating cash flow has
improved significantly from RM16m in 1HFY09 to RM59m YTD (from 1QFY10 of RM28m).

Maintain BUY. In anticipation of a better 2H for EPMB we continue to retain our earnings estimates.
With a forecasted FY10 core EPS of 9.7sen, EPMB is only trading at 5.2x FY10 PE relative to the sector
auto-parts sector PE of 7x. Valuing at the sector PE of 7x and rolling our earnings to reflect FY11
numbers as 1HFY10 closes we derive a new TP of RM0.82 (previously RM0.75) giving an upside of 60%
with our BUY call maintained. Additionally the stock also offers a decent gross dividend yield of 4% at
current price level. At a NTA per share of RM0.70, we see limited downside in the share price as it is
trading at a P/NTA of only 0.73x versus the auto-parts sector average of 0.80x. Maintain BUY.

OSK Research | See important disclosures at the end of this report 3

 OSK Research

EARNINGS FORECAST

FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f
Volume Balance Sheet
Perodua 167,393 166,736 175,390 203,450 224,290 PPE 333.9 327.4 305.1 273.1 237.1
Proton (incl. its 160,386 173,051 207,600 227,500 243,000 Intangibles 146.8 112.6 114.7 106.8 108.8
Exports) Others 3.1 5.4 5.4 5.4 5.4
Average Revenue 444 484 1,033 1,065 1,083 Total Fixed Assets 483.8 445.4 425.2 385.2 351.2
Per car (Perodua) - Receivables 89.8 81.7 95.0 103.7 112.4
RM Others 46.7 28.9 25.1 34.8 37.8
Average Revenue 2,027 1,619 1,355 1,281 1,287 Cash 13.5 16.8 23.1 31.7 42.7
Per car (Proton) - Total Current Assets 150.0 127.4 143.2 170.2 192.9
RM Total Assets 633.8 572.7 568.4 555.4 544.1
LT Borrowings 149.2 100.1 60.1 40.1 20.1
Income Statement Others 11.1 2.6 2.6 2.6 2.6
(RM'm) Total LT Liabilities 160.3 102.7 62.7 42.7 22.7
Revenue 483.7 468.0 578.0 630.7 683.6 Payables 129.0 107.3 148.7 158.7 172.4
EBITDA 62.5 86.2 89.9 91.3 97.7 ST Borrowings 122.4 130.9 110.0 90.0 60.0
Depreciation & -43.3 -58.8 -59.5 -59.3 -58.3 Others 2.1 5.0 7.2 7.4 7.6
Amortization Total ST Liabilities 253.5 243.1 265.9 256.1 240.0
EBIT 19.2 27.4 30.4 31.9 39.4 Total Liabilities 413.8 345.8 328.6 298.8 262.7
Interest Expense -14.2 -14.1 -8.1 -5.3 -2.8 Total Shareholder's 220.0 226.9 239.8 256.6 281.4
Interest Income 0.1 0.1 0.1 0.1 0.2 Equity
Profit before EI 5.0 13.4 22.4 26.8 36.7
EI -0.8 -13.4 0.0 0.0 0.0
PBT 4.3 -0.1 22.4 26.8 36.7 Cash Flow
Taxation 4.1 7.9 -5.6 -6.7 -9.2 PBT 4.3 -0.1 22.4 26.8 36.7
MI -0.8 -0.6 -0.6 -0.7 -0.8 Non Cash items 58.0 105.3 65.6 64.8 52.3
Net Profit 7.6 7.3 16.2 19.4 26.7 Net Chg in Working 3.0 3.7 27.1 -13.9 -4.0
Core Net Profit 4.3 12.8 16.2 19.4 26.7 Capital
Others 0.0 0.7 -5.6 -6.7 -9.2
Margin (%) CF from Operations 65.2 109.6 109.5 70.9 75.8
EBITDA 12.9 18.4 15.5 14.5 14.3 Net Capex -43.6 -50.5 -30.7 -20.6 -15.7
EBIT 4.0 5.9 5.3 5.1 5.8 Others -22.3 0.0 0.1 0.1 0.2
PBT 1.0 2.9 3.9 4.2 5.4 CF from Investing -66.0 -50.6 -30.6 -20.5 -15.5
Net Profit 1.6 1.6 2.8 3.1 3.9 Dividends Paid -1.0 -0.3 2.9 3.3 3.3
Core Net Profit 0.9 2.7 2.8 3.1 3.9 Net Change in 0.4 -62.9 -68.9 -45.3 -52.8
Effective Tax Rate -80.8 -59.5 25.0 25.0 25.0 Borrowings
(%) Others 0.0 0.0 0.0 0.0 0.0
CF From Financing -0.6 -63.3 -66.0 -42.0 -49.5
Y-o-Y % change Net Cash Inflow -1.4 -4.2 12.8 8.5 10.8
Revenue 59.6 -3.2 23.5 9.1 8.4 (Outflow)
EBITDA 99.1 38.0 4.2 1.6 7.0 Beg Cash 10.3 9.0 4.8 17.6 26.1
EBIT 105.8 43.1 10.9 5.0 23.3 Ending Cash 9.0 4.8 17.6 26.1 36.9
PBT -193.1 165.0 67.9 19.4 37.1 Other Restricted Cash 4.6 12.1 5.5 5.6 5.8
Net Profit -1,579.3 -3.5 121.9 19.6 37.9 Total Cash in Balance 13.5 16.8 23.1 31.7 42.7
Core Net Profit -163.9 198.9 26.7 19.6 37.9 Sheet

Per Share Data

Sales / Share (RM) 2.9 2.8 3.5 3.8 4.1 FCFF 32.1 69.7 84.8 54.3 62.3
Core EPS (sen) 2.6 7.7 9.7 11.7 16.1 FCFE 22.0 -3.8 9.8 5.1 7.3
BV/ Share (RM) 1.29 1.33 1.41 1.51 1.65 Net Cash / (Net Debt) -258.1 -214.2 -147.1 -98.4 -37.4
NTA/ Share (sen) 40.8 65.3 72.0 86.4 99.3
Dividend/ Share 0.0 1.0 2.0 2.0 2.0 Other Ratios
(sen) ROE (%) 3.5 3.3 6.9 7.7 9.8
FCFF/ Share (sen) 19.3 42.0 51.1 32.7 37.5 ROA (%) 1.2 1.3 2.8 3.5 4.9
FCFE/ Share (sen) 13.2 -2.3 5.9 3.1 4.4 Net Gearing 120.3 96.9 62.8 39.3 13.7
Interest Coverage 1.4 1.9 3.8 6.0 13.9
Valuations Dividend Payout Ratio 0.0 13.0 20.5 17.2 12.4
P/ Sales (x) 0.2 0.2 0.1 0.1 0.1 (%)
PER (x) 19.8 6.6 5.2 4.4 3.2
P/ Book (x) 0.4 0.4 0.4 0.3 0.3
P/ NTA (x) 1.2 0.8 0.7 0.6 0.5
Dividend Yield (%) 0.0 2.0 3.9 3.9 3.9
P/ FCFF 2.6 1.2 1.0 1.6 1.4
P/ FCFF 3.9 -22.1 8.7 16.7 11.6
EV/EBITDA 5.6 3.5 2.6 2.1 1.3

OSK Research | See important disclosures at the end of this report 4

OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed
will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or
financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment
decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest
and/or underwriting commitments in the securities mentioned.

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