EP Manufacturing Bhd - 2009

MARC has affirmed the short-term and long-term ratings of automotive part manufacturer, EP Manufacturing Berhad’s (EPMB) Murabahah Notes Issuance Facilities/Islamic Medium Term Notes (MUNIF/IMTN) of up to RM150.0 million and RM120.0 million at MARC-2ID/AID. The ratings carry a negative outlook. The affirmed ratings reflect EPMB’s dependence on the cyclical domestic automotive sector, its relatively high financial leverage given the cyclicality of its auto parts business, and substantial capital expenditures needed to support new model introductions by automotive manufacturers, somewhat mitigated by its leading position in the domestic safety and critical car components and technical collaboration with prominent international component makers. Domestic auto part makers’ profitability only began to recover in 2008 after two very difficult years due to decreased total industry volume (TIV) sales which are still below 2005 levels and high overheads in relation to sales volume. 

The negative outlook reflects EPMB’s significant upcoming debt maturities relative to its available liquidity and internally generated cash flow, which are in turn dependent on sales orders and capital spending. MARC believes that profitability and cash flow generation in the next six to twelve months will be strongly influenced by domestic automotive industry sales, which continue to be subject to cyclical fluctuations in demand. Should EPMB’s cash generation and financial leverage fail to improve, the ratings will likely be lowered. Conversely, if EPMB’s credit protection measures show consistent improvement, the negative outlook may be revised to stable.

Bursa Malaysia-listed EPMB is principally involved in the manufacturing of a wide range of automotive components for 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, sales to which have historically contributed more than 75% of the group’s revenue. EPMB leverages on its technical partnerships with leading auto part manufacturer, Robert Bosch GmbH, and lamp maker, Koito Manufacturing Co Ltd in the production of critical and high-value added components for modular assemblies. Of late, the increased volume of orders from Perodua has helped to promote a more balanced exposure between the two local automotive manufacturers. However, MARC believes that EPMB still faces significant customer concentration risk and would be significantly affected by a more subdued demand environment than presently anticipated.

EPMB’s water meter division, which has yet to report profits, showed a larger segment loss for the nine months ended September 30, 2009 of RM4.38 million compared to RM3.97 million for the preceding year corresponding period.

EPMB’s revenue for the period ended September 30, 2009 (3QFY2009) fell by 7% to RM337.3 million compared with FY2008. This is in line with the reduction in TIV sales which registered a reduction of 7.5% year-on-year to 397,619 units for the first nine months of 2009. Despite that, operating margins showed improvement to 4.84% on the back of lower raw material costs. Interest coverage as measured by OPBIT/interest expense has improved slightly to 1.39 times (x) in 3QFY2009 compared with 1.30x in FY2008. EPMB’s net operational cash flow (CFO) of positive RM44.1 million, up from RM42.2 million for the preceding year’s corresponding period, was largely used to fund its investing and financing needs. As a result, EPMB’s available liquidity in the form of cash and cash equivalents remained relatively unchanged from a year ago at RM10.0 million.

EPMB’s planned capital expenditure of RM50.0 million for FY2010 to FY2011 will be funded by a 5-year term loan. The effect of the new term loan on EPMB’s gearing which stood at 1.06x as at September 30, 2009 will be offset to a significant extent by repayments on the outstanding MUNIF/IMTN facility in FY2010 and FY2011. 

EPMB faces heavy debt repayments of RM45.0 million in FY2010, which could pose challenges to the group. MARC believes that EPMB’s ability to strengthen its earnings generation and balance sheet will likely be an important driver of its prospective financial flexibility and financing risk.

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