EPMB ... MAY10

EPMB’s FY09 revenue and earnings came in 5.5% and 9% above our estimates and consensus. The Group’s revenue and earnings for the quarter increased by 13% and
38% on the higher volume of OEM parts produced as orders picked up. Noting that
the localization programme of Perodua would increase its average revenue per
Perodua car to RM1033 (from RM484); we see EPMB potentially exhibiting strong top
and bottom-line numbers, for which we expect a growth of 20% and 72.2%
respectively in FY10 thanks to the significant reduction in its interest expense and
the economies of scale achieved in its production line. Despite results being higher,
we maintain our earnings with our TP retained at RM0.59. Maintain BUY.

A great quarter. EPMB’s revenue and earnings for the full year were lower by 3% and
15% on the back of the lower volume of OEM parts supplied to both Proton and Perodua.
Nonetheless, over the 4Q, as reflected from the higher demand of both Proton and
Perodua cars sold, its revenue and earnings for the quarter jumped 13% and 38% q-o-q
respectively (y-o-y: 6% and 8%). The improvement in its earnings was highly expected due to the better economies of scale achieved as EBIT margins notched up higher from 4.6% (in Q3) to 5%.

Still leaking. Its water segment remained disappointing as revenue dropped by 33% for
the full year with losses fortunately cushioned to the same level in FY08 after shifting operations to Malaysia last year. We expect orders for its smart water meter to pick-up to at levels achieved back in FY07 on the back of higher government spending for the replacement of water meters; hence, we expect the division to post marginal profit in FY10.

Improved balance sheet. Comparably, EPMB’s balance sheet has shown an improvement
since last year. Interest coverage in FY09 has increased slightly to 1.5x from 1.3x with net gearing reduced from 120% to 98.3% benefiting from the improved operating efficiency and financial leverage. We expect interest expense to reduce by 33% as its debt levels are pared down further on its improved top-line. This will eventually see its net gearing reduced to 75%.

Maintain BUY. EPMB’s essentially supplies OEM parts to automakers which are predominantly platform related, thus ensuring continuity over the long run. We like EPMB for its growing revenue base and earnings turnaround on the back of its improved balance sheet. Despite results being slightly above expectations, we continue to retain our earnings at this juncture with our TP unchanged. Our derived TP of RM0.59 is premised at 8x PE on its FY10 EPS. EPMB is considered relatively liquid to its bigger auto peers, Proton and UMW given its free float of 50%, despite the smaller market cap. In view of its strapped cash and high gearing, we do not expect any dividends over the next 3 years.