EP Manufacturing Bhd - 2007

Major Rating Factors

Strengths

• Tier One auto parts vendor with balanced product mix, focusing on safety components;
• Technical partnership with Bosch (international household name) and Koito (one of the world’s largest headlamp manufacturers); and
• Improved earnings diversity through injection of water meter manufacturing business.

Challenges/Risks

• Buyer concentration risk in relation to national carmakers, PROTON and PERODUA;
• Stiff competition vis-à-vis increasing competition from foreign marques resulting in pricing  and margin pressure; and
• High capital intensity of the business and the corresponding need for scale economies.

Rationale          MARC has affirmed its MARC-2ID /AID ratings of EP Manufacturing Berhad’s (“EPMB” or “the Group”) Murabahah Notes Issuance Facility/ Islamic Medium Term Notes Facility of up to RM150 million and up to RM120 million. The ratings outlook is developing. The affirmed ratings reflects EPMB’s recent positive earnings trends and increased likelihood that it will be able to restore its financial measures to levels appropriate for its current ratings on the back of improving automotive market conditions. Additionally, its proposed acquisition of electronic water meter manufacturer, Circle Ring Network Sdn Bhd (CRN), is expected to contribute towards improved revenue and earnings diversity. The developing outlook incorporates EPMB’s continued high exposure to national automakers and some uncertainty as to whether recent domestic vehicle sales performance will be sustained into the medium term.

On October 3, 2007, EPMB secured approval from its shareholders for the proposed acquisition of CRN, the manufacturer of patented electronic water meters for the UK-based Severn Trent Metering Services Ltd (STMS). CRN also holds exclusive rights to sell and distribute the electronic water meter in Southeast Asia, Taiwan, Australia, New Zealand, Japan and China. Profit contributions from CRN for the first three years of the post-acquisition period are supported by a profit guarantee provided by the vendors of CRN. The acquisition of CRN improves revenue diversity of the Group and reduces its exposure to the volatile automotive industry environment.

EPMB’s revenue and profitability declined in FY2006 in line with lower sales and production levels at PROTON. For the six months ended June 30, 2007, EPMB registered a pre-tax loss of RM6.5 million compared to a pre-tax profit of RM4.3 million in the corresponding period in 2006. Its cash flow remained adequate, nonetheless, as indicated by its debt service cover ratio (DSCR) of 2.81 times in FY2006 which was well above the covenanted minimum level of 1.50 times. Its debt-to-equity increased from 1.27 times as of end FY2006 to 1.36 times as of 1H2007 as a result of capital expenditure to cater for the new PROTON and PERODUA models. Under terms and conditions of the MUNIF/IMTN, EPMB’s debt-to-equity is capped at 1.50 times.

Improving industry fundamentals will drive EPMB’s performance over the next several quarters. EPMB’s strong technical partnership with Bosch focusing on safety components and its balanced sales mix will continue to support its above average market position in the domestic automotive parts industry.  Positive earnings development is expected for the second half of 2007 based on encouraging orders reported to date for the newly launched PROTON Persona vehicles and continuing strong sales of PERODUA Myvi and Viva models as well as contributions from its water meter business. Additionally, EPMB’s capital spending levels are projected to decline through 2010 with FY2006 being the last year of major front-end capital outlay to facilitate rollout of new car models by both national automakers.