Eastern Polymer Group

Eastern Polymer Group Plc 

 

The high earnings in FY2016 are not just a one-off, as most of the growth is coming from operations, not the industry-wide benefit of falling plastic price. Though the share has already rallied a strong 54% since Nov last year, its steady buildup of innovations that grow earnings will further drive the share price. We initiate EPG as BUY with end-2016 TP of Bt18/share based on 29x PE.  

 

FY2016 earnings jump not an exception. EPG reported outstanding earnings in 1HFY16 (Apr – Sep 2015) of Bt594mn, up 89% YoY. Our analysis suggests ~60% of earnings growth comes from its strong operations with revenue growth rising from economies of scale; importantly, a lesser portion of the earnings growth is from the industry-wide benefit from falling plastic prices. We like this factor since it means EPG’s earnings jump in 1HFY16 is fuelled by internal actions rather than external factors. That being said, the continued fall in plastics prices means better earnings ahead in 2HFY16.  

 

Rising high-margin products. We believe the automotive business (ARK) will be EPG’s key earnings driver. ASK is gearing up production of its new products such as side-step, canopy and deck cover, which attract a higher gross margin of ~30% vs. ~22% for its traditional products. We expect revenue contribution from high-margin products will jump to 52% in FY2018 from 18% of ARK’s revenue in FY2015. We expect the year of restructuring at TJM to pay off with net profit of Bt104mn in FY2017 and Bt189mn in FY2018, accounting for 6% of EPG’s earnings in FY2017 and 9% in FY2018. 

 

Innovations building earnings. The side-step for pickups is a recent product innovation – it is just as functional as the traditional steel-based product but both cost and weight are lower. It has met with great success, as seen in an order to produce 1mn pairs for the next five years, starting in FY2016. We expect this to contribute materially to revenue at Bt800mn/year or ~35% of ARK’s revenue in FY2015. ARK is in talks with several automakers – meaning more orders may be coming. Its packaging business (EPP) showed strong revenue growth in 1HFY16 driven by new products such as the jumbo plastic cup. EPG is continuing to develop new products and this will steadily grow earnings to add to its already strong operations. 

 

Earnings on the uptrend. After an earnings jump to Bt1.3bn in FY2016, we forecast strong core earnings of Bt1.8bn in FY2017 and Bt2.2bn in FY2018. Growth will be fuelled by two factors: 1) continued strong operations bringing core earnings of Bt1.7bn in FY2017 and Bt1.9bn in FY2018 and 2) continued addition of new innovative products to its stables – plus new orders - that will add Bt1.0bn revenue and Bt140mn core profit per year. The latter reflects our positive view on EPG’s innovative nature. Our forecast implies strong 29% core earnings CAGR in FY2016-18. 

 

BUY with end-2016 TP at Bt18/share. We initiate EPG as a BUY with end-2016 TP at Bt18/share by applying 29x PE (or 1.0x PE-to-earnings growth) on calendarized 2016 EPS of Bt0.61/share. We expect price to continue to rise despite the strong rally of 54% since November last year, backed by its steady addition of innovations to its lineup that will sustain earnings growth. Key risks are failure of new products, economic slowdown, plastic cost volatility and FX fluctuation.