EP Manufacturing Bhd - 2008 / 2009

MARC has affirmed the short-term and long-term ratings of automotive parts manufacturer, EP Manufacturing Berhad’s (EPMB) of up to RM150 million and RM120 million Murabahah Notes Issuance Facilities/Islamic Medium Term Notes (MUNIF/IMTN) at MARC-2ID /AID. The affirmed ratings recognise EPMB’s defensible market position in the domestic auto parts sector but high reliance on national carmakers in addition to its improved financial measures which had benefited from favourable end-market conditions during the first nine months of 2008. The ratings outlook has been revised to negative from developing to reflect a lack of earnings visibility beyond the first quarter of 2009, its tightening liquidity arising from its large capital spending for upcoming models, as well as slower-than-expected contribution from its water meter business. MARC expects the operating revenue outlook for the auto parts sector will be challenging in 2009 in line with deteriorating end-market conditions which have been notably affected by weaker consumer confidence, tighter credit availability and depressed used car values.

Bursa Malaysia-listed EPMB is principally involved in the manufacturing of a wide range of automotive components for both original and replacement markets. Through its 95.8%-owned subsidiary, PEPS-JV (M) Sdn Bhd, a Tier-one vendor, the group supplies auto parts to both local car makers, Proton and Perodua, which has historically contributed more than 75% of the group’s revenue. EPMB leverages on its technical partnerships with leading auto parts manufacturer, Robert Bosch GmbH, and lamp maker, Koito Manufacturing Co Ltd in the production of critical and high-value added components for modular assemblies. Ongoing efforts to increase its share of components produced for Perodua’s upcoming models will help to balance the group’s earning exposure between the two local car-makers, which is presently skewed towards Proton.

Returns from the group’s non-automotive investments have been below expectations thus far and are not expected to contribute significantly in the near term. The composite bicycle division has been disposed of during the year while the earnings generated by the water meter division continue to be subdued.

EPMB’s revenue for the year ended December 31, 2008 (FY2008) improved by 59.6% to RM483.7 million (2007: RM303.0 million) on the back of favourable end-market conditions arising from brisk new vehicle sales in 1H2008. Operating margins decreased to 3.80% (FY2007: 4.44%) due to higher operating expenses during the year. However, the group’s OPBIT interest coverage and OPBITDA return on assets improved somewhat in line with higher volume and economies of scale achieved. Beyond the first quarter of 2009, sales will be constrained by the slower demand already reflected in domestic new vehicle sales of late. Total industry volume (TIV) sales are expected to decline to 480,000 units based on Malaysian Automotive Association projections.

During FY2008, the group’s free cash flow improved to RM21.6 million (FY2007: RM13.4 million) attributable to lower investment and capital expenditure requirements. EPMB’s cash flow position may come under added pressure as it undertakes to supply parts to Perodua for its new MPV model. The RM25 million redemption from its RM150 million MUNIF/IMTN facility has been off-set by its drawdown from its term loan of approximately RM40 million to finance the investment required for Perodua’s new MPV model. The group’s debt leverage improved marginally to 1.23 times as at end-December 2008 (FY2007: 1.25 times), below the covenanted debt-to-equity cap of 1.50 times.

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