Eastern Pacific Industrial Corporation

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

EPIC climbs on buyout report

Eastern Pacific Industrial Corp (EPIC), a Malaysian oil and gas services provider, climbed to a 30-month high in Kuala Lumpur trading after a local financial weekly said Terengganu Inc plans to buy out the company.

The stock rose 7 per cent to RM2.26 at 10.24 am local time, set for its highest close since January 21, 2008.

Terengganu Inc, which has a 40.1 per cent stake in Eastern Pacific, is planning to buy the shares it doesn't already own in the company to take it private, the newspaper reported on August 7, citing unidentified people familiar with the plan. - Bernama

EPIC...Improved Numbers

EPIC's group revenue and profit before tax were up 29% and 34% respectively q-o-q due to increased port operations and O&G activities. This has brought about an EPS of 8.82 on quarterly basis (vs 8.20 in the corresponding period last year) and a half-year EPS of 14.71 against 12.78.

In 2 separate brokers' calls, Maybank Investment tags the target price for EPIC at 2.40 while OSK sets it at 2.43.

Broker's Call - 18 September 2009

Broker's Call - 18 September 2009: "– KNM Group (KNMG MK; RM0.805, BUY) – Broke out of downtrend channel.
– Eastern Pacific Industrial Corp (EPIC MK; RM1.59, BUY) – Likely to extend gains.
– Perisai Petroleum Teknologi (PPT MK; RM0.615, BUY) – The breakout from SMAs is positive.
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KNM Group (KNMG MK; RM0.805) – BUY
FY10P/E: 9.4x, P/BV: 1.7x

• The stock has broken out of its downtrend channel. Yesterday’s push above its 50-day SMA is another positive. Although consolidation would likely take place at current levels, we believe it is a healthy based-building pattern. Next up leg would likely take place after the MACD turns positive.
• Its indicators are showing signs of improvement. MACD has staged a positive crossover while RSI is also rising. Resistance is at RM0.845 and RM0.895.
• Traders may start to nibble to as low as RM0.765 (30-day SMA). However, always keep stop tight at below RM0.69.

KNM Group Berhad is an investment holding company. Through its subsidiaries, the company designs, manufactures, and maintains process equipment, pressure vessels, heat exchangers, skid mounted assemblies, process pipe systems, storage tanks, specialized structural assemblies and module assemblies for the oil, gas and petrochemical industries.
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Eastern Pacific Industrial Corp (EPIC MK; RM1.59) – BUY
FY10P/E: 7.0x, P/BV: 0.9x

• EPIC is gyrating in a symmetrical triangle formation. As this can be seen as a continuation pattern, we believe there is more room to the upside. After this consolidation, the stock may rise towards the RM1.66 and RM1.74 resistance levels.
• Both MACD and RSI are showing lacklustre trends. However, buying momentum would likely pick up after the candles edge above the key SMAs.
• Any pullback is an opportunity to buy. We may be wrong however if the candles eased below RM1.48. Therefore, a stop below RM1.46 is a must.

Eastern Pacific Industrial Corporation Berhad is an investment holding company. The company, through its subsidiaries, manages petroleum supply base for oil producers, provides and maintains port services and facilities, manages sludge, and handles cargo. Eastern Pacific also provides property development.
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Perisai Petroleum Teknologi (PPT MK; RM0.615) – BUY
FY10P/E: N/A, P/BV: 1.7x

• Perisai cut above its key SMAs yesterday. After recent consolidation, it seems that the stock is poised for a strong recovery mode. Immediate resistance is at RM0.645, followed by RM0.665 next.
• Technical landscape looks appealing. MACD has turned positive while its RSI is still neutral.
• Traders with greater risk appetite may want to buy during pullbacks. Support is seen at RM0.565-RM0.55. Cut loss however when it breaks below RM0.52.

Perisai Petroleum Teknologi Berhad is an investment holding company. The company, through its subsidiaries, manufactures, supplies, commissions, and installs corrosion control products as well as inspects and maintains pipes, risers, and heat exchangers for oil and gas industry.

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