EP Manufacturing Bhd - 2011

MARC has affirmed its short-term and long-term ratings of MARC-2ID /AID on EP Manufacturing Berhad's (EPMB) RM120 million Murabahah Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) Programme with a stable outlook. The rating action affects RM10 million of notes outstanding under the programme.

The affirmed ratings reflect the group’s strong domestic market position as leading Tier-1 vendor of critical safety components to Proton and Perodua and its improved cash flow protection and leverage metrics. At the same time, the agency recognises the moderate technological position of its auto parts business, the inherent cyclicality of the automotive industry and significant customer concentration to which the group is exposed, as well as the potential for greater external competition as a result of auto sector liberalisation.

EPMB, through its subsidiaries, is engaged in the manufacturing of components and parts for the automotive industry, manufacturing and distributing of electronic water meters and the management of water treatment facility. The group’s core business of manufacturing automotive components is undertaken by its now wholly-owned subsidiary, PEPS-JV (M) Sdn Bhd (PEPS-JV). PEPS-JV generates over 80% of its revenue from national automakers Proton and Perodua. As a consequence, its sales performance tracks the unit sales performance of Proton and Perodua. The group’s auto revenue grew 23.3% year-on-year in 2010 due to the brisk sales performance of passenger vehicle models in respect of which EPMB had supplied auto parts and components.

For the nine-month period ended September 30, 2011 (9MFY2011), the group recorded lower revenue of RM408.2 million (9MFY2010: RM455.3 million) mainly due to short-term disruptions to the supply chain brought about by the natural disasters in Japan and Thailand. Domestic passenger vehicle sales had declined marginally by 1% to 450,169 units for the 10 months to October 2011. The group’s profit margin remained resilient at 8.65% despite a loss at its water meter division of RM5.5 million (9MFY2010: loss of RM4.5 million) on revenue of RM12.8 million (9MFY2010: RM14.6 million). With no major capital expenditures, free cash flow was used to pay down scheduled debt maturities, bringing gearing as measured by debt-to-equity (DE) ratio to 0.74 times (x) as at end-9MFY2011 (FY2010: 0.80x), with only RM10.0 million outstanding under the rated programme and due in 2012.

The stable outlook reflects the agency’s expectation that EPMB should maintain sound credit metrics and adequate liquidity to meet its remaining near-term debt maturities under the rated programme. 

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