EPIC - BUY - 13 May 2008

Eastern Pacific Industrial Corp - Undervalued despite earnings growth potential (Results Note)

Price: RM2.13

Target Price: RM3.46

Recommendation: BUY

· 1QFY08 results seasonally within expectations. 1QFY08 core net profit of RM8.5m (excluding RM1.4m ESOS share based payment) comprised 22% of earnings estimate of RM39.2m and 23% of consensus estimate of RM37.0m. Furthermore, 1QFY08 revenue of RM57.4m was in-line with expectations.

· No revision in earnings estimates. 1Q and 4Q results are traditionally weaker than that of the 2Q and 3Q due to monsoon rains slowing exploration and production ("E&P") activities offshore leading to lower throughput at Kemaman Supply Base ("KSB"). Therefore, we maintain our full year FY08E net profit estimate of RM39.2m.

· 1QFY08 core net profit of RM8.5m (excluding RM1.4m ESOS share based payment in 1QFY08 and RM2.6m write down on short term investments in 4QFY07) is 10% lower QoQ due to heavier monsoon rains QoQ slowing E&P activities offshore leading to lower throughput at KSB. 1QFY08 core net profit of RM8.5m was 14% higher YoY due to maiden contributions from Mushtari Engineering & Trading ("Mushtari") from 4QFY07 onwards.

· Reiterate BUY call but downgrade target price from RM3.68 based on 16x FY08E PER to RM3.46 target price based on 15x FY08E PER, the average CY08E PER we ascribe to oil and gas companies under our coverage. RM3.46 target price reinforced by DCF derived fair value of RM3.50 utilising 5% terminal growth rate and 12% WACC.

· Undemanding valuations. EPIC is currently trading at only 9x FY08E PER and 4x EV/EBITDA, the most undemanding valuations amongst all the oil and gas companies under our coverage. We also expect reasonably attractive gross dividend yields of circa 4% going forward. At RM3.46 target price, investors can look forward to more than 60% upside potential.

· Major fabricator in the making. Its 60% JV with Offshoreworks Sdn Bhd to establish and operate an offshore and marine fabrication yard in Terengganu known as Terengganu Fabricators is scheduled to commence operations by end 2009 and at between 120 and 130 acres, EPIC has the potential to turn into the second largest fabricator in Malaysia.





KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department