Thursday, March 22, 2012

EPMB ... Mar12

TA Securities Research ...

1. Recent Developments
EPMB Buying Maju Expressway? The Edge Financial Daily reported today that EPMB will be
acquiring the Maju Expressway, or popularly known as MEX. Maju Expressway is currently owned by Maju
Holdings Bhd, a Malaysian owned diversified conglomerate. According to the article, the acquisition price is about RM1.7bn, which will be funded via issuance of Sukuk (RM1.2bn) and the balance via debts.

Management is tightlipped about the rumour except for saying that it could involve a significant acquisition that
could run into a few hundred million Ringgit. The stock has been suspended until the end of today. We expect an announcement at the end of market today.

Background on MEX
The owner of MEX, Maju Expressway S/B owns the highway concession linking Kuala Lumpur with Cyberjaya and Putrajaya. It boasts the shortest link between the business capital and the administration capital (about 20 minutes). In addition, MEX is also popular indirect link (compared with PLUS highway) from Kuala Lumpur to the two main airports in the country, KLIA and LCCT Sepang (KLIA - 30 minutes). MEX also provides regional connectivity between the Middle Ring Road 1 (MRR1) and the Middle Ring Road 2 (MRR2).

A Radical Move
The acquisition, if materialises, will significantly alter the profile of the group. Its current core businesses are
manufacturing of auto-parts and sale of smart water meter system. We are not aware of the company having
previous experience in managing highway concessions. The price tag of RM1.7bn, which we believe is the
Enterprise Value of the concession, is some 10x bigger compared with EPMB’s current market capitalisation of RM166mn.

Balance Sheet is Too Small to Absorb This Acquisition Given the relatively small balance sheet, we think that
a cash call is rather unavoidable. Total debts as at Dec 31, 2011 stood at RM163.7mn while cash balance
amounted to RM73.3mn. That translates into a net gearing of 0.3x. With this acquisition, total debts
could raise to close to RM2bn. That said, since MEX is a highway concession, the acquisition could be
partially funded on project financing basis. Assuming a 80%:20% debt:equity ratio on a RM1.7bn price tag,
we estimate that the net increase in holding company debts would amount to approximately RM500mn.
Some Potential in MEX The newspaper article quoted that average daily traffic (ADT) at MEX in 2010 was 78,962. Up to June 2011, that figure rose by another 17.5% to 92,785.

Since MEX is still relatively a new highway, we think there is room for growth. In addition, we expect
traffic volume to increase further if the direct link to KLIA is built according to plan. At this juncture
though, there is not much information available publicly to assess the viability of the highway.

2. Key Investment Risk
Key risk factors are, 1) high dependency to national marques, 2) stricter loan approval guidelines negatively
impacting vehicle sales, 3) margin compression arising from stiff competition and cost cutting measures
implemented by Proton/Perodua, and 4) significant structural reform from the revised NAP (scheduled for
release by June 2012) that could adversely impact domestic auto parts manufacturers.

3. Earnings Outlook
No change in earnings forecasts at this juncture. We shall review our earnings projections once an announcement is made later today.

4. Valuation & Recommendation
Share price has risen above our target price of RM1.11 on the back of speculation on the takeover. At this juncture, for consistency sake, we are leaving our Buy recommendation unchanged and target price unchanged.

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