EPIC

My Dearest ywt06,

EPIC, or Eastern Pacific Industrial Corporation Bhd, used to be one investment grade stock. Stocks that earned the praises from investment advisors like Dynaquest and Surf 88.

To give you an idea, here is an excerpt of a write-up dated back in June 2003 from Dynaquest's write-up published back on the Sunday Mail.

• Formerly a small corrugated carton maker, EPIC was reversed taken-over by Perbadanan Memajukan Iktisad Negeri Terengganu through a share and cash deal which brought in Kemaman Petroleum Supply Base (KPSB) as a subsidiary. KPSB has 186 tenants at its 130 ha site serving 55 offshore oil rigs to provide services ranging from oil production and exploration, fabrication, pipe threading, engine service and refurbishment, food supply, fuelling facilities as well as shipping and delivery services. For FY01, the cargo handled by KPSB increased by 44% to 686,340 tonnes compared to 476,773 tonnes in FY00. Similarly, total shipcalls to the port increase to 3,151 in FY01 from 2,181 in FY00.
  
  On 28.8.96, an EPIC-led consortium, Konsortium Pelabuhan Kemaman Sdn Bhd (KPK) was awarded in principle the privatisation of the East Wharf and the Liquid Chemical Berth of Kemaman Port for a 30-year period. On 15.3.2001, EPIC announced that the Economic Planning Unit of the Prime Minister's Department has issued a letter of approval pertaining to the privatisation of the port to KPK. EPIC will hold a 36% (reduced from the original 40%) equity interest in KPK. The other partners in the consortium are Road Builder (M) Holdings Bhd (49%) and Permodalan Terengganu Bhd (15%). Pending the completion of the privatisation process, EPIC's wholly-owned subsidiary, PBK Supplies & Services, continues to manage the port under a contract of management awarded in 1998. Kemaman Port, which has berths totalling 648 metres and depths of up to 16 metres, is a strategically located all-weather deep-sea port. In another separate development, EPIC has on 14.5.01, announced that it has been awarded in principle the privatisation of the redevelopment of Paka Township in Dungun, Terengganu by the Privatisation Development Committee of the local authority of the State of Terengganu. Hence, a speedy implementation of the privatisation of Kemaman Port and the redevelopment of Paka Township in Dungun, Terengganu will help to enhance the growth picture of EPIC in the future.
  
  The delay in the implementation of these privatisation projects coupled with the plunge in earnings in 4Q02 could have dampened EPIC's price performance over the last 12 months. Even based on the existing operations, EPIC has a relatively good track record of earnings. The group survived the last economic storm with a double-digit EPS over the last five years. The record EPS in 2000 of 28.83 sen (or +57.0% y-o-y) was only driven by a large tax write-back. Hence, the operating performance over the last two years would be better reflected by the profit growth trend above the line. The PBT actually grew by 17.0% in the next two years on the back of higher sales (+50.5%). The operating scenario was much more encouraging than what would have been suggested by the more than halving in the EPS during the similar two-year period under review. Having taken the big bath last year, EPIC's earnings should be back on its growth path in 2003. Based on our projected higher EPS of 16.0 sen for the current year, EPIC appears reasonably valued at a prospective PE multiple of 9.8 times (5-year PER range: 4.9x - 20.9x).
  
  EPIC is also financially strong with not only zero gearing but also cash in hand of RM1.19 per share as at 31.12.02. If the group's other assets were included, the NTA stood at a significantly higher RM3.14. Hence, at RM1.54, cash-rich EPIC also offers a hefty 51% discount on its asset-backing. The operating cashflow is not only steady but healthy as well, averaging about RM25m annually over the last five years. Measured against its relatively small capital base of 80.7m shares, EPIC can easily maintain its DPS at 8.64 sen nett this year. This translates to a DY of 5.6% nett which already exceeds the current low risk-free rate. The share price is now hovering near the year's low which is also a 12-month low. Given its fundamental strength and the anticipated rise in EPS this year, an upward price correction does not appear unlikely in the near term. Hence, we are compelled to add 2,000 shares of EPIC at RM1.54 for a total cost of RM3106.80

Some very basic investment reasoning.

And there was this article from Insider Asia (Asia Analytica Sdn Bhd) back in July 2003.

• EPIC – cash-rich, undiscovered oil & gas gem
  11/07/2003
  
  Ideas of the Week
  
  As the market continues to focus on oil and gas related plays, a relatively unknown company has only recently caught investors’ attention. Shares of EPIC (RM2.81) – which stands for Eastern Pacific Industrial Corp – have surged over the past week as investors looked for laggards in the current “hot” sector.
  
  We took a look at the company and found its shares to be very attractive – with steady earnings, a cash-rich balance sheet and a generous dividend yield – all at very low valuations. At RM2.81, its shares are trading at only ten times estimated 2003 earnings – well below the market’s 15-16 times average and the far higher multiples of other oil and gas companies.
  
  In sharp contrast to many of its peers that trade way above their book values, EPIC’s shares are trading 12.5 per cent below their March 2003 NTA of RM3.21. After the retention of year-end profits and before dividends, we expect that book value to rise to RM3.43 by end-2003.
  
  Net cash of nearly RM100 million
  For a small company, EPIC’s balance sheet is exceptionally strong. The company has net cash totaling RM97.1 million – or a substantial RM1.20 for each of the 80.65 million shares in issue. Its reserves are twice its paid-up capital. If we strip off its sizeable cash hoard, the current market price values EPIC’s underlying operations at just 6.3 times earnings.
  
  Based on the last two years’ payout, EPIC offers an attractive gross dividend yield of 4.3 per cent. This could potentially increase should the company decide to return surplus cash to shareholders. For a stock that’s in the arguably “hot” oil and gas sector, EPIC’s valuations do look very undemanding indeed, and offers value not just for situational investors, but longer ones too.
  
  Petroleum supply base monopoly
  EPIC may not be well known among investors, but the Terengganu-based company actually operates the country’s largest petroleum supply base – and the only one in Peninsular Malaysia. This gives it a monopoly in the supply depot business on the east coast of Peninsular Malaysia, where most of the peninsula’s oil reserves lie.
  
  Kemaman Supply Base (KSB) began operations in 1982 as onshore support base dedicated solely to service and supply the offshore petroleum operations. It was specially designed and developed as a comprehensive logistic supply base for Peninsular Malaysia's offshore petroleum exploration and production industries.
  
  From its 130 ha site, KSB provides a whole range of services to Petronas production sharing contractors. These services include cargo handling, vessel berthing, waste management, warehousing facilities and equipment supply services. KSB currently has around 200 oil-related tenants and supplies services to 55 offshore oil platforms in the waters off Terengganu.
  
  Unlike most privatizsation exercises, there is no concession period for KSB, which is 99.1 percent-owned by EPIC. This gives EPIC an assured earnings stream – for as long as there is oil off the eastern coast of Peninsular Malaysia. EPIC has also been managing Kemaman Port since 1998.
  
  EPIC has an institutionalized shareholding structure, with the Terengganu State Economic Development Corporation holding 40 percent, followed by Lembaga Tabung Haji (21.7 per cent) and Tan Sri Saleh Sulong (5.9 per cent).
  
  Steady, monopoly-like earnings
  Unlike most oil and gas companies, EPIC’s earnings are steady, given its monopoly status in Peninsular Malaysia and assured clientele. Over the last five years, pre-tax profit, before provisions, averaged about RM25-30 million annually (except in 2000 when it dipped to RM17.1 million). Pre-tax margins were a high 46-49 per cent over the past two years.
  
  In 2002, pre-tax profit declined 17.3 per cent to RM20.2 million, but this was due solely to a RM10 million provision for earlier investments in shares and unit trusts. The company appears to have now parked all its cash in safer bank deposits. Further provisions are unlikely with investments in quoted shares having fallen to just RM0.4 million in March 2003.
  
  Excluding these provisions, pre-tax profit for 2002 actually rose 16 percent to RM30.3 million on the back of an 18 percent rise in revenue to RM62.2 million. An excluding provisions, net profit would have been RM20.9 million and EPS at 26 sen (instead of 13.4 sen as reported).
  
  P/E of just 6.3 times, excluding cash
  For the first three months of 2003, EPIC reported pre-tax and net profit of RM7.4 million and RM5.1 million, respectively. EPS was 6.3 sen. We estimate a full year EPS of around 28 sen – which translates into a forward P/E of just 10 times.
  
  If we exclude its cash, valuations are even cheaper. At RM2.81 per share, EPIC has a market capitalisation of RM226.6 million. Deducting its cash reserves gives a residual value of RM129.5 million for its underlying operations. If we exclude net interest income of RM2 million, the residual estimated net profit is RM20.6 million. This suggests the underlying operations are being valued at just P/E of 6.3 times.
  
  Attractive dividend yield, room for more
  Gross annual dividends over the past two years have been consistent at 12 sen annually, which provides a decent gross yield of 4.3 per cent. With nearly RM100 million sitting in the bank and annual earnings of 28 sen, there is ample room for dividend payouts to increase in the future, unless they are reinvested elsewhere.
  
  Growth prospects
  Growth prospects will hinge on the overall growth of the local oil and gas industry, increasing utilisation rates and capacity, or price hikes for its range of services – where it has a monopoly. The current high oil price environment encourages more exploration and production activities, and in turn increases demand for facilities and services offered by KSB.
  
  EPIC expects exploration and oil drilling activities to surge in the third quarter of 2003, following the expected completion of oil platform construction works at Lapangan Bintang, located 220 kilometres off the shores of Terengganu. The company is investing about RM19 million in additional capacity for its facilities to meet demand growth.
  
  To complement its existing business, EPIC has also ventured into sludge management. Instead of disposing crude oil sludge, its newly acquired technology allows for sludge to be quantified, removed and separated into oil, water and sediment safely, quickly and in an environmentally friendly manner. This new business started operations in mid-2003.
  
  The group is also venturing into property development – but on a small scale and through lower-risk privatization schemes. Its inaugural project, the 4.4ha Paka Business Centre is designed to serve the local oil and gas resident community. More than 60 per cent of the first phase of 75-shops has been sold. Construction started in March 2003.
  

And performed EPIC did. And it did hit a high of 4.00 back in early 2004.

However, there's always a danger of assuming too much with companies with strong nett cash position.

Firstly, do not get me wrong, I would always prefer companies with a nett cash position than one heavily burdened with debts.

However, I have to be realistic enough to realise that the ultimately the management always has the final say on the cash. Meaning to say, if a company has a cool 200 mil in their piggy bank, do not assume that by investing in the company, one would get full entitlement to this 200 million. For example a company could always make new investment decision, like diversifying into a new business than returning extra cash back to its shareholders.

And this is what EPIC did with the extra cash. It made INVESTMENTS.

• EPIC to venture into property development
  By Michelle Kuan, 3.53pm
  
  Eastern Pacific Industrial Corporation Bhd (EPIC) is venturing into property development to broaden its income base as a move to reduce its dependency on its core businesses.
  
  Its maiden project is the development of a business centre project on a 4.4ha site in Paka, Terengganu with the first phase comprising 29 units of two-storey shop offices and 49 units of three-storeyed shop offices and a bazaar.
  
  The company's current core business is the management and operation of a petroleum supply base besides providing and maintaining port servicing facilities through its unit, Pangkalan Bekalan Kemaman Sdn Bhd
  
  Chairman Datuk Wan Abd Muttalib Wan Musa Embong said the new venture in property development was expected to start contributing to the company's bottomline in the current financial year ending Dec 31, 2003.

Now let's check out this property development thingee. To get a brief idea let's look at its next fiscal year, fy 2004 Q4 earnings. Quarterly rpt on consolidated results for the financial period ended 31/12/2004. Open the word file attached, and if you look under the property development, under segmental results, the property development project was rather dismal, yes? And more interestingly, in EPIC's latest earnings result, there was not even a mention of property development under their segmental result.

And then in Feb 2004, it made another investment.

• EPIC has entered into a subscription agreement for 13.1% stake in Aurado Exploration Ltd for C$10.5m (equivalent to RM30.2m). Aurado is a Canada-based company involved in the acquisition, exploration and development of oil and gas properties. The company has production facilities in Canada and is developing a discovery in Kazakhstan as well as seeking other strategic opportunities in the Caspian region. Aurado’s five year goal is to secure gross production of 100,000 barrels per day and gross reserves of 1b barrels. Aurado reported a net loss of C$2.5b in FY02.

These are some of the things that truly baffles an investor. Spending some 30 million to invest in a loss making business venture, is perhaps not too appealing to most investors. And for some investors, they would always want and prefer to see the extra cash returned back to the shareholders. ( See the point made earlier on 'there's always a danger of assuming too much with companies with strong nett cash position.' )

Now this investment venture was a disaster! See EPIC's fy 2005 Q4 Earnings in Feb 2006. Quarterly rpt on consolidated results for the financial period ended 31/12/2005 (Note how, EPIC's cash has shrunk over the years!) This is what the management had to say.

• For the fourth quarter under review, the Group reported revenue of RM21.7 million, a drop of 12% as compared to RM24.7 million achieved in the same quarter in the preceding year. The Group recorded loss before tax for the current quarter of RM10.1 million, a decrease by 235% from RM7.5 million profit before tax recorded in the fourth quarter of 2004.
  
  For the twelve months ended 31 December 2005, the Group recorded higher revenue of RM84.3 million against RM80.1 million for the same period in the preceding year arising from recognition of deferred billing and higher oil and gas activities. The Group recorded profit before tax of RM13.7 million for the period ended 31 December 2005 compared to RM31.3 million achieved in the same period in the preceding year. Decrease in profit before tax was mainly due to provision made for doubtful debt and diminution of investment.
  The petroleum supply base operation remains as the main contributor to the Group performance.

So the decrease in profit before tax was mainly due to provision for doubtful debt and diminution of investment WHICH LED TO EPIC POSTING NET LOSSES OF SOME 15 MILLION FOR THE QUARTER.

And for some investors, the explanation was simply so vague and the company could have simply done better in explaining exactly what happened.

Here is an excerpt of RHB notes written back then.

• Although the full year FY05 turnover of RM84.3m was in line with our expectation of RM82.3m, net profit of RM2.2m came sharply below our forecast of RM24.3m and the consensus estimate of RM24.5m. According to EPIC’s results announcement, the earnings decline was due to provision for doubtful debt and diminution of investment. No further details were given, but we believe the provision was in relation to the company’s failed C$10.5m investment in Canada-based oil and gas company, Aurado Energy Inc.

The best they could have done is to guess what had happened!

And the next quarter, earnings was rather dismal. Quarterly rpt on consolidated results for the financial period ended 31/3/2006

And here is some RHB notes.

• Recommendation: SELL
  
  Lower 1Q profits. EPIC reported lower-than-expected 1QFY12/06 net profits of RM0.7m (-89% yoy) despite higher turnover of RM23.6m (+26% yoy). Although EPIC appears to be also benefiting from the rise in oil and gas activity, profits were however affected by higher operating costs, lower investment income, plus a RM2.9m provision for a 1998 legal dispute. We have thus cut our FY06-07 EPS forecasts by 43% and 24% respectively.
  
  Provision for lawsuit. On 1 March 2006, the High Court ruled against EPIC with regards to a lawsuit filed in 1998. Although EPIC has filed an appeal against the judgement, the company had to provide for the liability amounting to RM2.9m in its 1Q results.
  
  We note that EPIC provided around RM15m in the 4Q05 results for Aurado Energy Inc, a failed investment in 2004. Subject to an ongoing lawsuit to recover the investment, the balance of RM15m remains in the books, and potentially may have to be provided for later.

And earnings somehow recoverd for the better. EPIC reported earnings of some 1.888 million (do note that this is a far cry from its previous year same quarter earning of some 7.2 million) Quarterly rpt on consolidated results for the financial period ended 30/9/2006

And in Feb 2007, earnings recovered more. Quarterly rpt on consolidated results for the financial period ended 31/12/2006. EPIC reported some earnings of 3.8 million.

And here is the link to its most recent quarterly earnings reported in July 2007. Quarterly rpt on consolidated results for the financial period ended 30/6/2007. EPIC reported some earnings of some 8.077 million.

Hence for me, EPIC used to be a decent stock. It got into trouble with some rather poor and dismal investments. Now, its earnings has begun to turnaround for the better.

Btw, there was a posting before on EPIC: EPIC, Trade Receivables and lack of transparency

• Here is another example of 'trade receivables' issue.
  
  Quarterly rpt on consolidated results for the financial period ended 31/12/2005
  
  Eastern Pacific Industrial Corporation or better known as EPIC announced its earnings yesterday. See the link above. In which you can see that EPIC reported rather huge losses of 15.499 million out of a sales revenue of 21.672 million for its fiscal 2005 4th quarter.
  
  According to EPIC, the losses were due to provision for doubtful debt and diminution of investment.
  
  What is disturbing for me is that EPIC made no attempt to explain why and how this provision was made. This is a clear example of lack of transparency and the lack of respect towards its minority investors.
  
  Now, luckily I had a copy of the RHB research on EPIC today, in which the analyst tried to explain where the provision came from. Makes me wonder... why the company can’t come out and set the record straight instead of folks like RHB trying to guess what happened! Make any sense? Look at the size of losses! A loss of 15.4999 million from a sales turnover of 21.672 million is relatively huge in size!
  
  Here is what RHB ‘under-standing’ of what happened.
  
  We believe EPIC made a provision relating to the failed C$10.5m investment in Canadian oil and gas company Aurado Energy Inc in February 2004. Although the London Court of International Arbitration ruled in EPIC’s favour in March 2005, we believe the company failed to recover the full amount estimated to be more than RM30m.
  
  The "Trade and other receivables" item in the FY05 balance sheet has only dropped by RM18m which suggests that a portion of the investment remains on the books. Assuming the provision is RM18m, this would imply that operating profit for 4QFY05 was still below our expectations resulting in EPS (excluding the estimated provision) of 12.4 sen, or a 9% decline yoy.
  
  For the record, currently EPIC’s trade receivables amounts some 46.9 million while last year, same period, the trade receivables was at some 29 million.
  
  Hmm…. Yet another example of unknown risks involved when trade receivables increases drastically…