The ratings of MARC-2ID /AID with negative outlook assigned to EP Manufacturing Berhad’s (EPMB) proposed issuance of Murabahah Notes Issuance Facility/Islamic Medium Term Notes Facility (MUNIF/IMTN) with nominal value of up to RM120.0 million, reflect the Group’s position as a Tier-1 parts vendor for the national carmaker, PROTON Holdings Berhad (PROTON) and Perusahaan Otomobil Kedua Sdn Bhd (PERODUA), via its subsidiary; PEPS-JV (M) Sdn Bhd (PEPS-JV). Meanwhile, the negative outlook is underpinned by EPMB’s dependence on the sales performance of national cars which historically contributed more than 73% to the Group’s revenue. Moreover, the automotive industry outlook appears negative on the back of increasingly stringent approval requirements for hire purchase loans and relatively higher interest rates for used vehicles financing, aggravated by depressed used car prices and generally negative consumer sentiment arising from higher energy/crude oil prices.

EPMB manufactures and supplies automotive products to both the original and replacement markets. Its original markets mainly comprise national car makers, i.e. PROTON’s and PERODUA’s production requirements, while its replacement market covers both PROTON and PERODUA’s service and parts centres.

EPMB has evolved into largely a modular supplier and systems integrator. Its main prospects are driven by its 89.5%-owned subsidiary PEPS-JV, being a tier-one supplier to PROTON and PERODUA, and banking on their upcoming new car models. PROTON and PERODUA accounted for more than 73% of EPMB’s total sales in FY2005. Recognising the risk of over-dependence, EPMB has embarked and now actively diversifying its revenue sources. With the advent of AFTA, EPMB is positioning itself to secure more contracts from other leading non-national car makers vis-à-vis its on going capacity expansion.

In FY2005, the Group’s revenue surged 25.5% to RM300.1 million, driven by higher sales of national vehicles which grew 4.0% year-on-year to reach 312,651 units in 2005 (2004: 300,626). EPMB’s operating profit margin has marginally reduced but remains at a respectable level of 10.30% in FY2005. This was primarily due to higher depreciation and amortization expense, which have steadily increased in tandem with higher capital expenditure incurred for expansion since FY2003. Excluding these non-cash items, its operating profit margin appears relatively stable for the past three financial years, hovering between 13% to 15%.

The MUNIF/IMTN issued in FY2004 (RM117 million) has resulted in EPMB’s debt leverage increasing to 0.80 times. EPMB’s gearing level marginally improved to 0.78 times in FY2005, attributed to increased shareholders’ fund as a result of accumulation of retained earnings as well as injection of new capital arising from the issuance of Irredeemable Convertible Unsecured Preference Shares (ICUPS). Under the terms and conditions of the MUNIF/IMTN issues, EPMB’s gearing is capped at 1.5 times. EPMB’s pro-forma debt-to-equity ratio is calculated to reach 1.16 times upon the issuance of the MUNIF/IMTN.