Eastern Polymer Group

Eastern Polymer Group Plc (EPG)

 

We expect EPG’s core earnings to be a record high at Bt1.8bn in FY2017 (April 2016–March 2017), backed by outstanding revenue growth in its automotive business, operational turnaround at TJM and new innovative products that will more than offset the narrowing in gross margin brought by an expected rise in plastics price. We maintain our BUY call on EPG with TP at Bt18/share.

 

FY2017 guidance suggests stronger operations. EPG targets FY2017 revenue growth of 20% YoY to Bt10.5bn with: 1) 32% YoY growth in the automotive business (Aeroklas: ARK) to Bt4.8bn, 2) 10% YoY growth in the insulation business (Aeroflex: AFC) and 3) 10% YoY growth in the plastic packaging business (EPP). The biggest thrust to earnings is ARK, with revenue boosted by rising side-step production to 240-270K sets this year, doubling from 120K sets in FY2016. A big contributor will also be TJM, its automotive accessories business in Australia, with revenue surging to Bt1.3bn from Bt903mn in FY2016 on the introduction of 10 new pickup and SUV accessories. EPG expects stable gross margin in FY2017 from 33% in FY2016 and lower SG&A to revenue from 19% in FY2016 as it will not have a repeat of the costs related to the acquisition and restructuring of TJM that accounted for ~1% of revenue. 

 

Rising plastics price already in forecast. The bottoming of oil price in 1Q16 and rising plastics price (QTD average plastic price is up 11% QoQ, though down 16% YoY) has led to market concerns about the gross margin for EPP (packaging accounted for 29% of revenue and 26% of gross profit in FY2016). We had anticipated a rise in raw materials price and forecast a narrowing in EPP’s gross margin to 28.8% in FY2017 from 30.4% in FY2016 on the assumption of an 8% increase in average plastics price in FY2017. However, margin will not be pressured materially in the near term since the company has low-priced inventory that will supply production for the next three to six months, i.e. through December. Although gross margin is down, it is still above historical average of 21% and Thailand peers’ of 8-19% thanks to benefit from economies of scale brought by higher revenue and cost advantage from automated production. 

 

Record high core earnings. We forecast strong core earnings of Bt1.8bn in FY2017, up 39% YoY from Bt1.3bn in FY2016. Growth will be fuelled by two factors: 1) Bt1.7bn core profit from strong operations and no repeat of the costs from TJM as in FY2016 plus operational turnaround with profit of Bt104mn and 2) steady addition of new innovative products and/or new orders that will add Bt1.0bn to revenue and Bt140mn to core profit. The latter reflects our positive view on EPG’s innovative positioning. By business, we believe ARK has the highest chance of new orders given rising automaker interest in its side-step.

 

Maintain BUY with TP at Bt18/share. We see EPG as an earnings play, with strong earnings momentum supporting a rise in share price. We maintain our BUY call on EPG with TP at Bt18/share.