Eastern Polymer Group

Eastern Polymer Group Plc   

 

Management presentation at EPG’s analyst meeting was positive, with better earnings ahead in 4QFY16 (Jan–Mar 2016) and FY2017 (Apr 2016 – Mar 2017). EPG’s share price has fallen by 14% from recent peak and we see this as an opportunity to accumulate the stock and get in on the earnings growth in 4QFY16-FY2017 off stronger operations and the industry plus from low plastic price. BUY with TP at Bt18/share.  

 

Better earnings in 4QFY16. Going by management guidance, we expect earnings to be better with growth both YoY and QoQ in 4QFY16, backed by three factors. 1) Higher revenue and gross margin for the insulation business (Aeroflex: AFC), led by growing revenue from premium products in the U.S. Note that AFC’s revenue and gross margin were soft in 3QFY16 (Oct–Dec 2015) due to holidays in the U.S. 2) An improving margin in the packaging business (EPP) as there will be no year-end promotions and rebates for clients as there was in 3QFY16, plus plastic price is still low. 3) Better operations in the automotive business (Aeroklas: ARK) as it expands side-step production.  

 

Stronger in FY2017. After establishing new revenue and earnings bases in FY2016, EPG targets a rise in revenue to Bt10-11bn in FY2017 (up ~17% from Bt8.5-9bn target in FY2016 and in line with our forecast). Of its three businesses, ARK and EPP will provide the most fuel. For ARK, EPG plans to add new machines to boost side-step production to meet the orders for 1mn pairs through FY2020 (a five-year project). TJM, the automotive accessories business in Australia, will shift product sourcing from China to Thailand, which will reduce costs. In March 2016, TJM will introduce 5-6 new pickup and SUV accessories; EPG expects each of these products to contribute A$3-4mn (Bt75-100mn) revenue/year. We expect the year spent restructuring (FY2016) and continuous development at TJM to pay off in FY2017 with a net profit of Bt104mn (from zero in FY2016) and this will be a key component in EPG’s core earnings growth in FY2017. EPP plans to increase capacity 25% to 32,000 tons/year in 1QFY17 to serve growing demand. 

 

Continues blessed by low plastic price. Recent oil price fluctuations has led the market to worry that plastic prices may go up with a resultant hit to EPG’s gross margin, particularly for EPP, as plastic is its raw material. In our view, EPG’s earnings growth is primarily driven by strong operations with accelerating revenue growth rather than the industry-wide benefit of falling plastic price; also, plastic prices are less volatile than oil price. Therefore, we believe EPG will continue to exhibit a strong gross margin. YTD, plastic prices have dropped 14% YoY and 6% QoQ on average and the company says its low-priced inventory will support production for the next three to six months, i.e. through 2QFY17.  

 

Earnings on the uptrend. BUY at TP of Bt18/share. EPG’s share price has fallen by 14% from its recent peak, dragged down by negative sentiment from oil price fluctuation. However, we see this as an opportunity to accumulate the stock for better earnings in 4QFY16 and outstanding earnings growth in FY2017, particularly since this is primarily arising out of sound fundamentals, with strengthening operations – and the industry-wide benefit from low plastic price is a plus. We maintain BUY on EPG with end-2016 TP at Bt18/share.