EPMB ... Dec10

OSK Research

Toning Down Estimates

Save for its YTD exceptional gain amounting to RM7.70m, EPMB’s earnings continued to disappoint in view of our bullish expectations earlier, accounting for only 56% of our full-year forecast. While we continue to like its earnings prospects in view of the favorable outlook for the automotive sector for 2011-2012, we have
nevertheless decided to trim our earnings for FY10 by 23% and 3%-4% for FY11-FY12. Pegging the stock at a lower PE of 6x (as opposed to 7x earlier), we downgrade our TP to RM0.68 (from RM0.82) although our BUY call is maintained.

Weighed down by higher depreciation. In tandem with the drop in TIV, EPMB’s revenue declined by 6% q-o-q, but due to the low base affect in 2009, the auto parts maker managed to chalk up revenue growth of 35% YTD owing to the higher production at its auto parts and water meter divisions. This boosted core earnings by 99.3% over the corresponding 9MFY10. Save for the exceptional gain of RM7.7m YTD (from the write back of over-provision for intangible assets), EPMB’s core 9MFY10 earnings of RM9.09m fell
short of our estimates, making up only 56% of our full-year forecast even though revenue was in line.

Heavy depreciation cost. We feel the higher-than-expected costs incurred were attributed to higher depreciation and amortization costs for the new Perodua parts assembly line, noting that its 9MFY10 cash flow from operations increased remarkably from RM44m to RM70m YTD. We note that EPMB’s depreciation policy is based on production output. In view of the fact that the bulk will be depreciated over the first year of completion of the assembly line, we expect depreciation to gradually decline moving forward.

Margins continue to improve. EPMB continued to see sequential improvement in margins, which are now at their highest level, thanks to higher economies of scale and narrowing losses from its water meter division and lower interest expenses. EPMB’s YTD core net profit margin currently stands at a high of 3.69% as opposed to last year’s 1.35%.

Shaving off earnings on lower expectations. With the 2010 results remaining sluggish given the slower 4Q and profit shortfall, we trim our earnings estimates for FY10 by 23% and 3-4% for FY11-FY12. This consequently trims our TP to RM0.68 (from RM0.82) premised on its FY11 earnings, which we now peg at a lower PE of 6x (previously 7x based on sector PE) in view of its small market cap of only RM84.6m and high net gearing of 78% (although we note this has fallen from 1x early this year). Given the stock’s attractive
upside of 36%, we continue to maintain our BUY call on the company.