Eastern Polymer Group

Eastern Polymer Group Plc (EPG)

 

EPG is an earnings play, backed by good earnings in 4QFY16 (Jan–Mar 2016) and a projected earnings jump of 37% in FY2017 (Apr 2016 – Mar 2017), fuelled by growing automotive businesses and new innovative products. EPG has underperformed the market by 12% over the past three months and the better earnings ahead will be a catalyst for the share price. BUY on EPG with end-2016 TP at Bt18/share. 

 

Preview 4QFY16: Up YoY and QoQ. We expect 4QFY16 core earnings of Bt374mn, up 80% YoY and 6% QoQ. Behind this is:  

 

1) Revenue of Bt2.4bn, up 33% YoY and 5% QoQ. Automotive business (Aeroklas: ARK) will show the strongest revenue growth at 57% YoY and 5% QoQ from higher revenue from TJM, the automotive accessories business in Australia, and expansion of side-step production. We expect revenue from the insulation business (Aeroflex: AFC) to grow 22% YoY and 7% QoQ driven by rising revenue from premium products in the U.S. and off a soft 3QFY16 (Oct–Dec 2015) due to the year-end holidays. The packaging business (EPP) will show revenue growth at 18% YoY and 3% QoQ. 

 

2) Wider blended gross profit margin at 33.4%, from 28.4% in 4QFY15 and 31% in 3QFY16. ARK will show the strongest gross margin improvement at 29%, up from 21.9% in 4QFY15 and 27.5% in 3QFY16, due to higher revenue from high-margin products and consolidation of TJM. We estimate a gross margin for EPP of 31%, up from 24.9% in 4QFY15 and 28.1% in 3QFY16; the YoY increase comes from more revenue and benefit from falling plastic price and the rise QoQ from no year-end promotions and rebates for clients as in 3QFY16. We expect AFC’s gross margin to come in at 42%, up from 39.3% in 4QFY15 and 39.1% in 3QFY16 due to rising revenue. 

 

Strong operations plus innovation propel earnings in FY2017. We maintain our forecast of 37% growth to Bt1.8bn in FY2017, with ARK and EPP its main engines. For ARK, revenue from side-step production is rising and we expect revenue from this item to surge 67% YoY to Bt800mn in FY2017. We also see a good chance of side-step orders from other automakers down the road, as ARK is in talks with several. The strong SUV market in Australia (SUV sales in Australia grew 17% YoY in Jan–Feb) plus new product launches will improve TJM operations and we expect it to turn from a drag to driver with net profit at Bt104mn (from zero in FY2016). After the success of the 32-oz jumbo plastic cup, EPP plans to launch a new product: a clear plastic cup suitable for both cold and hot beverages. We expect this to take share from the paper cups normally used for hot beverages. EPP also plans to increase capacity by 25% to 32,000 tons/year in 1QFY17 (Apr–Jun 2016) to serve growing demand. On the cost side, EPG is enjoying a windfall from lower plastic price (YTD plastic prices have dropped 12% YoY on average) and it says its low-priced inventory will support production through 3QFY17 (Dec 2016). 

 

BUY at TP of Bt18/share. Over the past three months, EPG’s share price has underperformed SET by 12% and we expect the better earnings ahead in 4QFY16– FY2017 to be a catalyst. We maintain BUY on EPG with end-2016 TP at Bt18/share.