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Saturday March 24, 2012

EPMB buy positive for long term

PETALING JAYA: EP Manufacturing Bhd's (EPMB) acquisition of Maju Expressway Sdn Bhd (MESB) may not appeal to investors now but the deal is expected to give EPMB a sustainable income stream from toll collection in the long term.

The RM1.7bil acquisition, inclusive of MESB's debts, has skyrocketed the auto part maker's net gearing from 33% a year ago to 435% but EPMB had said that the toll concession that came with the acquisition was a potential cash cow.

The management told an analyst briefing on Thursday that Maju Expressway (MEX) could be loss-making until 2016 but EPMB was confident it could cope with the high net gearing incurred through free cashflow reinforced by a likely toll hike in 2013.

OSK Research analyst Ahmad Maghfur Osman wrote in a report that although the research house concurred with that view, EPMB would likely be an unappreciated counter following depressed overall margins due to high interest and depreciation costs.

“With the toll hike coming next year, we expect MEX to only be profitable by 2014 and report a net income of RM7.2mil by then,” he said, noting that the projected profit would only have minimal impact in comparison with EPMB's net profit, projected at RM32.4mil, for the financial year 2014.

Ahmad trimmed EPMB's earnings for financial years 2012 to 2014 sharply by 45% to 58%.

He said that as the toll matured in 10 to 15 years, the free cashflow generated would exceed RM250mil annually.

TA Securities analyst James Ratnam did not revise the earnings forecast in his report, citing the lack of details on the deal.

He said EPMB was bullish of traffic growth, underpinned by rapid expansion of Cyberjaya and increased connectivity when the Seri Kembangan interchange is completed.

“Moreover, discussions are already underway for the KL International Airport (KLIA) extension, which we believe would further boost traffic flow, especially after the current low-cost carrier terminal is relocated next to KLIA in 2013,” he said.

He noted that EPMB executive chairman Hamidon Abdullah's company Nadayu Properties Bhd was involved in the development projects.

Ahmad said the potential tariff hike could be higher than its previous forecast of 50 sen to RM1, seeing that EPMB was paying the full price for MESB.

The previous parent company, Maju Group, was given government grants worth RM976.7mil to fund the MEX project that cost RM1.32bil.

Ahmad said given that EPMB's margin was still thin from its auto parts business, the diversification was too sudden and drastic.

“If EPMB wants to be a conglomerate, that's fine but the margin is still thin and the sudden diversification to an unrelated business would really impact its return on equity (ROE),” he said, adding that “investors will not view this positively”.

Ahmad cited Delloyd Ventures Bhd, also an auto parts manufacturer, which diversified into the plantation sector.

“When Delloyd acquired the plantation business, it was a sudden drastic move.

“Investors looked at the expectations and earnings (of a company), that's why until now, Delloyd is not under investors' radar because of its un-synergistic diversification,” he said.

EPMB's share price has tumbled 25% from RM1.12 before it announced the deal to close at 84 sen yesterday.

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