EPMB has entered into an acquisition agreement with MajuHoldings to acquire the MEX for RM1.15bn, which including assuming debtstotaling RM550m, values the deal at RM1.7bn. Although traffic growth isexpected to be resilient, from a valuation standpoint, the deal  looks pricey and  raises  our  concern  that it may cause EPMB's net gearing to  to 457% this year.  Besides, the high interest cost will erode earnings in the immediate term.  Given its excellent run but this pricey acquisition,we downgrade EPMB to a NEUTRAL from a BUY, slashing  our fair value from RM1.38 to RM1.15.

The proposedacquisition of Maju Expressway (MEX). EP Manufacturing announced that ithas entered into an acquisition agreement for the proposed acquisition of MEXfor RM1.15bn, which including debt totaling RM550m, values  the deal at RM1.7bn. The purchase will be mostly funded by borrowings totalingRM1.575bn, with the remaining portion  tobe funded  by  internal cash.  Using the privatization of PLUS  forwhich EV/EBITDA was used as a valuation yardstick, we deem the deal's valuationon the high side.  The acquisition'sEV/FY13 EBITDA of 14x represents a 55% premium versus the valuation for PLUS.While the valuation is somewhat high, management has guided that IRR willbe  around  17%, which we reckon  may somewhat compensate for the higher valuation versus PLUS' IRR of 14%. At13x EV/EBITDA, the payback period may stretch to 16 years, which is positivelyshorter than the concession's remaining 21 years.

Resilient trafficgrowth. Since commencing operation in 2008, traffic on MEX has grown by aCAGR of 21% from a daily traffic of 51,073 to approximately 90,000 in 2011. Thegrowth is attributed to: i) to the increasing population in Putrajaya andCyberjaya, ii) the preferred route for travel to these 2  areas since thehighway  cuts through highly populatedtownships and fast developing areas, and iii) it is the preferred route toKLIA, riding on the growth of air travel, notably the low cost carrier segment.

High interest to costhits earnings; downgrade to NEUTRAL. We estimate a decline in profits forFY12 (by 36%) due to higher interest expenses although earnings for FY13 andFY14 earnings will subsequently improve. The company's  expanded share base (including50m shares from the issuance of new securities) will dilute its EPS by 8-22% despitethe higher profits  anticipated for  FY13. As the acquisition cost will be heavilyfunded by debt, EPMB will see its net interest expenses soar from RM11.4m inFY11 to RM24m per annum. This would cause its net gearing of 33.2% in FY11 tobloat to 457% in FY12.  Thus we downgradeEPMB to a NEUTRAL from BUY, with our fair value slashed from RM1.38 to RM1.15.

Source: OSK188