Eastern Pacific Industrial Corporation

kltrader

Publish date: Tue, 10 Aug 2010, 04:01 PM

Target RM2.43

THE BUZZ

Over the weekend, the Edge Weekly reported that the state-controlled Terengganu Inc SB is planning to privatise its 40.13% unit, EPIC. It reported that Terengganu Inc has approached some of the other large shareholders of EPIC to buy over their equity, which will then trigger a mandatory general offer that would ultimately lead to privatization. Although we are not aware which shareholders Terengganu Inc has approached, the bigger ones are Ahmad Zaki Resources Bhd (AZRB, 21.3%), Amanahraya Trustees Bhd (4.7%), Great Eastern Life Assurance (M) Bhd (4.5%), private company TIS? ATA? Ashar SB (3.9%) while the rest have

shareholder of below 1%.

OUR TAKE

Nothing new. This potential privatization is not new as it came to our knowledge sometime in early 2009. However, back then, we gather that it was not successful because the offer price from Terengganu Inc of RM2.10 was not acceptable to its second largest shareholder, AZRB, which we understand wanted about RM2.50/share.

What has changed? From the industry standpoint, we believe the current industry outlook is much better compared to that in early 2009 as we believe the worst for the O&G industry is over. We see more O&G contract awards being dished out later this year through to 2011 given the stabilization in crude oil price at USD70-USD80/barrel. This compares with early 2009 when the industry was negatively impacted when oil price crashed from its high of over USD140/barrel in mid-2008 to an average USD43/barrel in 1QCY09.

Impact to offer price. Due to the better O&G industry outlook, we believe most of Epic?s other shareholders would want a higher offer price to entice them to give up their stakes. Furthermore, based on its recent 2QFY10 results, EPIC?s performance has improved as revenue and net profit jumped 30.1% and 51.2% q-o-q and 20.9% and 12.7% YTD following the increase in O&G activities off the coast of Terengganu. Its 2QFY10 net asset of RM2.04 per share (NTA of RM1.94) was also slightly higher than RM1.84 (NTA of RM1.71) in

1QFY09.

What?s a fair price for EPIC? This time, the Edge Weekly did not disclose the price desired by any of the other shareholders of EPIC, apart from Terengganu Inc. EPIC?s current share price is at its highest level since 2009, and the stock is trading at a P/NTA of close to 1x compared to 1QFY09, during which its P/NTA was only about 0.6x, We believe this higher valuation is in line with its improved outlook. In the O&G industry, the P/NTA is currently averaging about 2x (excluding KNM). Hence, our conjecture is that the offer price acceptable to the other shareholders would be about RM2.00-RM3.00, which is a P/NTA of around 1.0- 1.5x as historically, EPIC?s share price had been trading at below P/NTA of 1x.

Maintain Buy. Our target price for EPIC remains unchanged at RM2.43 based on the existing PER of 8x FY11 EPS. We like the company?s attractive dividend yield of about 5%-6% and its net cash of RM65.8m as at 2QFY10.

By OSK188

Analyst: Jason Yap

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