Costly highway buy
EP Manufacturing gearing to reach 457% after deal
KUALA LUMPUR: EP Manufacturing Bhd’s (EPMB) acquisition of Maju Expressway (MEX) from Maju Holdings is too expensive and will likely pan out to the detriment of its shareholders in the medium to longer term, an analyst said.
According to an OSK Research report, EPMB is actually paying Rm1.7bil for the MEX highway after accounting for the debts totalling Rm550mil.
“From a valuation standpoint, the deal looks pricey and raises our concern that it may cause EPMB’S net gearing to (reach) 457% this year. The purchase will be mostly funded by borrowings totalling Rm1.575bil, with the remaining portion to be funded by internal cash,” said OSK analyst Ahmad Maghfur Usman in a report yesterday.
“As the acquisition cost will be heavily funded by debt, EPMB’S net interest expenses will rise substantially from Rm11.4mil in financial year (FY) 2011 to Rm24mil per annum and cause its net gearing to spike from 3.2% in FY2011 to 457% in FY2012,” he said.
The initial funding, which will see EPMB going deeper into debt, for the acquisition will likely hurt the company’s profitability given the high gearing and the acquisition will only be incremental to EPMB’S earnings by the third quarter of FY2012.
Ahmad Maghfur said that using the privatisation of plus expressways as a yardstick, the acquisition of the MEX highway was expensive in comparison.
“Using the privatisation of PLUS Expressways for which enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/ EBITDA) was used as a valuation yardstick, we deem the deal’s valuation on the high side. With the acquisition valued at an EV/FY2013 EBITDA of 14 times, this is a 55% premium on PLUS’ valuation,” he said.
“Management believes that this acquisition will be positive as it will provide a stable recurring income going forward. While we concur here, the fact that the company has to take on massive debts while still in a net gearing position will depress its valuation,” he added.
OSK, which had downgraded the stock from a buy to neutral with a fair value price target of RM1.15, added that there would be a decline in profits for FY2012, estimating it to plunge by 36% due to higher interest payments to its creditors.
Ahmad Maghfur said “earnings for FY2013 and FY2014 will subsequently improve” as well but the increase of shareholdings base would in turn serve to dilute these additional earnings.
“The company’s expanded share base (including 50 million shares from the issuance of new securities) will dilute its earnings per share by 8%-22% despite the higher profits anticipated for FY2013,” he noted.
With this acquisition, another issue of the flexibility of future toll rate hikes also crops up. This issue relates closely to the Government’s wishes to slowly reduce tolls judging from the recent trend of what happened to PLUS and toll reductions announced subsequently by the Government.
“At the proposed price of rm1.15bil, Maju Holdings will walk away with a whopping return of Rm668mil, noting that its Rm1.32bil cost includes a government grant of Rm976.7mil,” he said.
“The question now is, since the Government’s original intention is to minimise tolls and the fact that EPMB is paying the full price without taking into consideration the government grant received by Maju Holdings, will EPMB get the flexibility to raise toll tariff?” analyst Ahmad Maghfur asked.
EPMB ended the trading day 13.8% or 15.5 sen lower at 96.5 sen yesterday.