EP Manufacturing Market Price: RM0.80 Market Capitalisation: RM132.77Mil

Mercury Securities Sdn Bhd L-7-2, No.2, Jalan Solaris, Solaris Mont Kiara, 50480, Kuala Lumpur Tel: 603-6203 7227 Email: [email protected] CORPORATE UPDATES 29/03/2011 EP Manufacturing Market Price: RM0.80 Market Capitalisation: RM132.77mil

Bhd Board: Main

Stock Code/Name: 7773/EPMB Sector: Consumer, Cyclical

Recommendation: Hold Target Price: RM0.75 Analyst: The Research Team “Acquisition of the Maju Expressway’s concession KEY FINANCIALS for RM1.15 Billion” Key Stock Statistics 2012F On 16 March 2012, EP Manufacturing Bhd (EPMB) EPS (sen) 10.1 had entered into an agreement to acquire the Maju P/E (x) 7.9 Expressway Sdn Bhd (MESB) together with its Dividend/Share (sen) 0.0 business for a total consideration of RM1.15 billion NTA/Share (RM) 1.52 from Bright Focus Sdn Bhd (a part of the Maju Book Value/Share (RM) 1.55 Group of Companies) and Ulimas Sdn Bhd. MESB is the concession owner and operator of the 26km Maju Issued Capital (mil shares) 204.42 Expressway (MEX) which is the fastest route for 52- weeks share price (RM) 0.57-1.13 commuters to travel between Kuala Lumpur City Major Shareholders: % Center to Putrajaya and Cyberjaya and onwards to Mutual Concept Sdn Bhd 37.21 KLIA. The concession will expire in year 2037 Hamidon Bin Abdullah 5.09 (remaining period of 25 years).

“Too big to swallow” Ratio Analysis 2010 2011 2012F 2013F Book Value/Share (RM) 1.2 1.3 1.6 1.7 EPMB plans to raise total funds of RM1.7 Billion to Earnings/Share (sen) 12.7 18.6 10.1 12.5 satisfy the RM1.15 Billion payable to Bright Focus Dividend/Share (sen) 2.0 2.0 0.0 0.0 Sdn Bhd and Ulimas Sdn Bhd for the MEX Div. Payout Ratio (%) 15.7 10.7 0.0 0.0 concession and to redeem MESB’s existing Islamic PER (x) 6.3 4.3 7.9 6.4 Medium Term Notes worth of RM550 million. The issuance of 38.462 million new EPMB shares of P/Book Value (x) 0.7 0.6 0.5 0.5 RM1.30 each (worth RM50 million) will increase Dividend Yield (%) 2.5 2.5 0.0 0.0 EPMB’s paid-up capital from RM165.9 Million to ROE (%) 12.7 18.6 10.1 12.5 RM204.4 million. As a result, the Net Asset per share Net Gearing (Cash) (x) 0.69 0.43 5.37 4.57 will drop 3 cents from RM1.47 to RM1.44, and the *Based on shares outstanding of 204 million after the proposed Gearing will have a hefty jump of 663% from 0.8x acquisition. to 6. 11x. Although EPMB claims that the RM1.3 *Dividend payout to be restricted after acquisition billion Sukuk is expected to be “ring-fenced” at SPV P&L Analysis (RM mil) 2010 2011 2012F 2013F level and as such of no recourse to EPMB, but we Year end: Dec 31 Revenue 587.5 577.1 623.3 673.1 opined that EPMB is the primary beneficiary of the Operating Profit 43.3 41.9 56.5 64.6 SPV, and EPMB will be the top obligor for the Depreciation 81.7 83.9 87.3 94.2 borrowing. Hence, we should include the RM1.3 Interest Expenses 10.9 12.2 30.8 33.0 billion Sukuk borrowing under the SPV in EPMB Pre-tax Profit 32.4 29.7 25.7 31.6 balance sheet in assessing and evaluating its financial Effective Tax Rate (%) 19.8 -28.3 19.5 19.0 position and debt repayment capability. Net Profit 26.0 38.1 20.7 25.6 Operating Margin (%) 7.4 7.3 9.1 9.6 In view of EPMB’s market capitalisation of only Pre-tax Margin (%) 5.5 5.1 4.1 4.7 RM139 million, this is indeed a huge acquisition and Net Margin (%) 4.4 6.6 3.3 3.8 whether EPMB can swallow it successfully is in

All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or individuals connected with it may have used research material before publication and may have positions in or may be materially interested in any stocks in the markets mentioned. This report has been prepared by Mercury Securities Sdn Bhd for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and has been compensated to undertake the scheme. Mercury Securities Sdn Bhd has produced this report independent of any influence from 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/ Mercury Securities Sdn Bhd (Page 2/4) 06 Mar 2012 doubt. The price tag of RM1.15 Billion for the “Pricey price tag?” MEX’s concession is about eight times its current market capitalisation. The management claimed that We opine that the fair value for the concession is the acquisition was in line with their policy of roughly worth about RM980 million, derived from expanding their business portfolio to a different our Discount Free Cash Flow Model based on the industry, and the best part of the acquisition is it will publicly available information. With the purchase generate a stable recurring income for the group. price of RM1150 million, EPMB is paying a 17% However, we see this as merely a conglomerate premium for the concession. At this moment, we acquisition which the synergy to be created is can’t affirm whether EPMB is overpaying for the deemed minimal. concession conclusively as we believe the purchase price might have factored in the future toll hikes, The huge borrowing is expected to cause EPMB to high-traffic growth of the MEX, and high population incur high-interest expenses and encumber its growth in Cyberjaya and Putrajaya. In addition, the existing core business profitability. For example, recent toll-abolishment for the Cheras-Kajang assuming the cost of funds for the Sukuk is 6%, the highway by the government has shown the interest expenses will cost about RM78 million, government’s intention to minimize the tolls and which is extremely burdensome. Besides, according benefit the public. Since the government’s intention to the management, they will lose some flexibility in is to minimize the tolls, the question arising here is: dividend policy as they are bound by the debt Does EMPB has the flexibility in raising the tolls' covenant. The dividend payout is only allowed when tariff in the future? If not - is there any subsidy or the group generates profit and cash flow that exceed compensation payable by the government to the certain benchmarks pre-set in the debt covenant. concession holder? Without further access to the Notably, the management expected that the MEX concession details, we are unable to make a clear will only started noticeably contributing to EPMB’s conclusion. bottom lines from 2016 onwards. “Emergence of the new major shareholder – Tan The details of the source of funding are as follow:- Sri Abu Sahid Bin Mohamed”

Description RM (Mil) Tan Sri Abu Sahid is the largest owner of the MEX concession, through his 96.83% shareholdings in Internally generated funds 75 Bright Focus Sdn Bhd (BFSB), which is also the Issuance of Consideration Shares 50 single largest shareholder in MESB. Upon the Borrowings 225 completion of the proposed acquisition, BFSH will Issuance of RULS 100 emerge as one of the major shareholders in EPMB with shareholding of 18.22% of the total shares Issuance of SPV Sukuk 1250 outstanding. Tan Sri Abu Sahid is presently the Total 1700 Group Executive Chairman of Maju Holdings Sdn *Source: Company Bhd Group of Companies. He is also a Chairman of Kindteel Bhd. Besides serving on the Board of Selected Balance Sheet items after the proposed Perwaja, Tan Sri Abu Sahid sits on the board of acquisition:- Konsortium Lapangan Terjaya Sdn Bhd, is the Audited as After the Executive Chairman and major shareholder of at proposed Ipmuda Berhad, Group Executive Chairman of 31/12/2010 acquisition Bright Focus Berhad, a director of MTH Power RM'000 RM'000 Berhad (formerly known as Perwaja Berhad) and an Share capital 165,960 204,422 alternate director and major shareholder in Pulai Share premium 14,069 25,608 Springs Berhad. Tan Sri Abu Sahid also holds a Reserve 63,452 63,452 directorship in various other private limited Shareholders fund 243,481 293,482 companies. In addition, he is the Honorary President of the Selangor and Federal Territory Engineering No. of EPMB shares ('000) 165,960 204,422 and Motor Parts Traders Association. We believe NA per EPMB share 1.47 1.44 EPMB will benefit from his impressive list of expertise and industry experience. Total borrowings 194,711 1,819,711 Gearing/SHF (x) 0.80 6.11 *Source: Company

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This report has been prepared by Mercury Securities Sdn Bhd for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and has been compensated to undertake the scheme. Mercury Securities Sdn Bhd has produced this report independent of any influence from 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/ Mercury Securities Sdn Bhd (Page 3/4) 06 Mar 2012

“Valuation” We set a HOLD call for EPMB with a fair value of RM0.75, pegging to a PER of 6x, based on our forecasted EPS of 12.5 cents FY13. Our view is even though the price tag for the concession is fairly valued, but we see the huge extra borrowing will definitely drag EPMB’s bottom lines in next few years before the MEX started contributing in 2016. Excluded the Sukuk borrowing of RM1300 million, which will be financed under the SPV, EPMB’s borrowing for the year 2012 will be approximately RM490 million after the proposed acquisition, which is expected to include high interest expenses of about RM30 million, assume the cost of borrowing is 6% per annum.

“Limited short-term upside”

Hence, we foresee that EPMB’s net profit will drop significantly in near term. We do agree with the management that the acquisition will offer EPMB a stable recurring income in future, but according to the management, this will only happen from year 2016 onwards. Hence, the short-term outlook for EPMB will be relatively gloomy, mainly due to the high finance cost.

EPMB: Price Chart

Source: Bloomberg Source: Corporate website, Google

Toll rates

Salak South Toll Plaza

Class Type of vehicles RM

0 Motorcycles, bicycles or vehicles with 2 or less wheels Free 1 Vehicles with 2 axles and 3 or 4 wheels excluding taxis RM1.50 2 Vehicles with 2 axles and 5 or 6 wheels excluding buses RM3.00 3 Vehicles with 3 or more axles RM4.50 4 Taxis RM0.80 5 Buses RM0.80

Putrajaya Toll Plaza

Class Type of vehicles RM 0 Motorcycles, bicycles or vehicles with 2 or less wheels Free 1 Vehicles with 2 axles and 3 or 4 wheels excluding taxis RM2.50 2 Vehicles with 2 axles and 5 or 6 wheels excluding buses RM5.00 3 Vehicles with 3 or more axles RM7.50 4 Taxis RM1.30 5 Buses RM1.30

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