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 manufacture 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. On-going 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 off during the year while the earnings generated by the water meter division continue to be subdued.

EPMB’s revenue for the nine-month period ended September 30, 2008 (3Q2008) improved by 78.6% to RM361.1 million (3Q2007: RM202.2 million) on the back of favourable end-market conditions arising from brisk new vehicle sales. Operating margins have also increased to 5.2% (FY2007: 4.4%) owing to higher value product mix and improved operational efficiencies. MARC expects EPMB to be able to sustain its topline growth in fiscal 2008 in view of confirmed orders for key Proton and Perodua models until February 2009. Beyond the first quarter of 2009, sales will be constrained by the slower demand already reflected in domestic new vehicle sales of late. Monthly sales of new vehicles in Malaysia continued to contract 6.7% year-on-year in November 2008, based on data released by the Malaysian Automotive Association.

During 3Q2008, the group’s free cash flow declined sharply to RM19.4 million (FY2007: RM52.2 million) due to higher debt servicing commitments on the MUNIF/IMTN coupled with capital expenditure incurred on new components for both existing models and development of new models. EPMB’s cash flow position may come under added pressure as it undertakes to supply parts to Perodua for its new MPV model. The group’s debt leverage improved marginally to 1.21 times as at end-September 2008 (FY2007: 1.25 times), below the covenanted debt-to-equity cap of 1.50 times, attributable to retained earnings for the nine-month period. The funding of capex through borrowings will not impact EPMB’s debt leverage as it will be offset by scheduled redemption of the MUNIF/IMTN.

Contacts:
Hafizan Haron 03-2090 2238/ hafizan@marc.com.my;
Nor Azlina, 03-2090 2256/ norazlina@marc.com.my.