MARC has affirmed EP Manufacturing Berhad’s (EPMB) short and long term ratings of MARC-2ID/AID respectively on its RM150.0 million MUNIF/IMTN; reflecting the Group’s position as a Tier-1 parts vendor for the national carmaker, Proton Holdings Berhad (Proton) and Perusahaan Otomobil Kedua Sdn Bhd (Perodua), via its subsidiary; PEPS-JV (M) Sdn Bhd (PEPS-JV). Moderating factors include its dependence on the sales performance of national cars which historically contributed more than 73% to the Group’s revenue coupled with uncertainties surrounding the domestic automotive industry arising from regulatory issues and/or policy changes. The industry’s short-term outlook appears negative with sales of new vehicles continue to be dragged down by the depressed used-car market, compounded by dwindling re-sale values, tighter credit practice and increasing inflationary pressures.

EPMB manufactures and supplies automotive products to both the original and replacement markets. Its original markets mainly comprise national car makers, i.e. Proton’s and Perodua’s production requirements, while its replacement market covers both Proton and Perodua’s service and parts centres.

EPMB has evolved into becoming a modular supplier and systems integrator. Its main prospects will be driven by its 89.5%-owned subsidiary PEPS-JV, being a tier-one supplier to Proton and Perodua, especially with its upcoming new car models. While Proton and Perodua accounted for more than 73% of EPMB’s total sales in the past, it recognises the risk of over-dependence hence is actively diversifying its revenue sources. With the advent of AFTA, EPMB is positioning itself to secure more contracts from other leading non-national car makers following its on going capacity expansion.

In FY2005, the Group’s revenue surged 25.5% to RM300.1 million, driven by higher sales of national vehicles which grew 4.0% year-on-year to reach 312,651 units in 2005 (2004: 300,626). Revenue growth, over the medium-term, is expected to be positive in tandem with the forecasted number of sales from Proton and Perodua. EPMB’s operating profit margin has marginally reduced but remains at respectable level of 10.30% in FY2005. This was primarily due to higher depreciation and amortization expense, which have steadily increased in tandem with higher capital expenditure for expansion since FY2003. Excluding these non-cash items, its operating profit margin appears relatively stable for the past three financial years, hovering at 13% to 15%.

The Islamic MUNIF/IMTN issued in FY2004 (RM117 million) has resulted in EPMB’s debt leverage increasing to 0.80 times in FY2004. EPMB’s debt leverage has however marginally improved to 0.78 times in FY2005, attributed to increased shareholders’ fund as a result of accumulation of retained earnings as well as injection of new capital arising from the issuance of Irredeemable Convertible Unsecured Preference Shares (ICUPS). Under the terms and conditions of the Islamic MUNIF/IMTN issue, EPMB’s gearing ratio is capped at 1.5 times.