Eastern Polymer Group

Eastern Polymer Group Plc (EPG)

We estimate 1QFY17 (Apr–Jun 2016) core earnings at Bt380mn, up 58% YoY and 8% QoQ, backed by good revenue, wider gross margin and higher equity income. This strong earnings momentum is expected to continue through 2QFY17 (Jul–Aug 2016), but the market has yet to respond to this as seen in the 13% underperformance to the market over the past three months. We see this as an opportunity to accumulate. We maintain BUY on EPG with TP at Bt18/share.

 

Preview 1QFY17: Better both YoY and QoQ. We estimate net profit at Bt380mn, up 32% YoY and 9% QoQ. Excluding FX gain/loss shows a jump in core profit of 58% YoY and a rise of 8% QoQ. Meeting our estimate would bring 1QFY17 to 21% of our full-year forecast vs. 20% historical average. It will release results on August 15, 2016. Key assumptions are:

 

1) Revenue Bt2.3bn, up 11% YoY and 7% QoQ. Most of the rise in revenue came from the automotive business (Aeroklas: ARK). We estimate ARK’s revenue excluding TJM (the automotive accessories business in Australia) at Bt700mn, growing 27% YoY and 1% QoQ, mostly from rising side-step and canopy production. TJM’s revenue is expected at Bt250mn, up 7% YoY and 13% QoQ after it introduced more accessories in March. We expect revenue from the insulation business (Aeroflex: AFC) to grow 7% YoY and 10% QoQ and revenue from the packaging business (EPP) to increase 3% YoY and 8% QoQ. Slow YoY growth for EPP is due to long holidays in Thailand in the quarter.

 

2) Blended gross margin at 34.9%, widening from 30.8% in 1QFY16 but lower than

 

36.4% in 4QFY16. By business, ARK will show the strongest gross margin improvement at 35%, up from 26.4% in 1QFY16 and 33.6% in 4QFY16, thanks to rising revenue from high-margin side-step and canopy products plus consolidation of TJM. EPP’s gross margin will be 29.5%, down from 31% in 1QFY16 and 31.7% in 4QFY16 due to softer revenue growth. We estimate AFC’s gross margin at 40.0%, up from 36% in 1QFY16 but down from 45.2% in 4QFY16. 

 

3) Equity income at Bt65mn, up 41% YoY and 19% QoQ, mostly from better operations at Tokai Eastern Rubber as auto production in Thailand improves as well as off the low base in the previous quarter.

 

Better earnings ahead in 2QFY17. Revenue will increase from seasonality and the strong blended gross margin should continue, supported by rising revenue from high-margin products, relatively stable raw material price (QTD average plastic price fell 5% YoY and is flat QoQ); also, the company has low-priced plastic inventory that will supply production through December. We maintain our forecast of core earnings of Bt1.8bn in FY2017, up 39% YoY.

 

Maintain BUY. EPG’s share has underperformed the market by 13% over the past three months despite anticipation of strong earnings in 1QFY17 and better earnings prospects overall. We see this as an opportunity to accumulate the stock. We maintain BUY on EPG with TP at Bt18/share.