EP Manufacturing Bhd - 2010

MARC has affirmed its MARC-2ID/AID ratings on EP Manufacturing Berhad's (EPMB) RM150.0 million Murabahah Notes Issuance/Islamic Medium Term Notes (MUNIF/IMTN) facilities and RM120.0 million MUNIF/IMTN facilities. At the same time, the outlook on the ratings has been revised to stable from negative. The rating action affects RM8.0 million of outstanding notes issued under the RM150.0 million MUNIF/IMTN maturing in 2011 and RM50.0 million of outstanding notes issued under the RM120.0 million MUNIF/IMTN.

The revision of the outlook to stable reflects the improving financial performance of EPMB for the nine- month period ended September 30, 2010 (9M2010), higher cash flow from operations and reduced debt leverage. MARC expects domestic automotive industry conditions in the next 12 months to remain supportive of EPMB's cash flow generation and continued debt reduction.

The affirmed ratings, meanwhile, reflect EPMB's defensible domestic market position in the critical safety components segment of the automotive parts sector while recognising the substantial degree of business risk to which it is exposed as a result of inherent industry cyclicality and customer concentration.

EPMB is involved in the manufacturing of components and parts for the automotive industry and the manufacturing and distribution of electronic water meters for the water industry. EPMB's automotive parts business is mainly carried out through its 95.8%-owned subsidiary PEPS-JV (M) Sdn Bhd, a Tier-1 vendor of original and replacement automotive parts to the domestic automakers.

The automotive business provides all of the group's profits as the water meter division remains loss-making. The automotive segment reported a segment pre-tax profit of RM35.9 million for 9M2010 (full year 2009: RM30.9 million) while the water meter division posted a segment pre-tax loss of RM4.5 million (full year 2009: RM17.3 million loss).

EPMB's significantly improved financial performance for 9M2010 benefited from a writeback of provisions relating to its acquisition of a water meter subsidiary, Circle Ring Network Sdn Bhd, as well as higher revenue  and  earnings  contributed by its  automotive segment. Its automotive segment saw its revenue increase to RM440.7 million for the nine-month period (9M2009: RM330.8 million) boosted by new car launches by domestic automakers, Proton and Perodua, and improving consumer sentiments, lifted by domestic economic recovery. The group posted pre-tax profits of RM23.8 million for the nine-month period.

The group maintains a favourable cash conversion cycle, aided by its implementation of just-in-time inventory management. Its inventory turnover days has been maintained below 40 days in recent periods. EPMB's cash flow from operations (CFO) interest coverage remained strong at 8.06 times (x) for 9M2010. EPMB's relatively strong free cash generation has allowed the group to pare down its debt. As at end-September 2010, EPMB's debt-to-equity ratio improved further to 0.85x, from 1.02x as at end-2009. As at end-September 2010, the group had cash and cash equivalents of RM6.2 million and a negative net working capital position, albeit meaningfully reduced from prior year levels.

MARC expects EPMB to maintain adequate liquidity to address its upcoming debt maturities of RM48.0 million under the rated facilities in 2011. The ratings could be pressured if EPMB experiences significant deterioration in its cash flow generation, debt service coverage ratios and financial flexibility.

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