THAILAND EQUITY RESEARCH Eastern Polymer Groupepg.listedcompany.com/misc/analyst-research/20160203-epg-pst-en.… · In 2014, AFC captured a 65% share of the domestic insulation market
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THAILAND EQUITY RESEARCH
Page | 1 | PHILLIP SECURITIES (THAILAND)
Closing Price(Bt) 14.00
Target Price(Bt) 14.00 (+1.18%)
COMPANY DATA
O/S Shares (mn) : 2,800
Market Cap. (Btmn) :
Market Cap. (USDmn) :
52‐WK Hi/Lo (Bt) : 15.8/8
3M Average Daily T/O (mn) : 32.70
Par Value (Bt) : 1.00
MAJOR SHAREHOLDERS (%)
1. Vitoorapakorn Holding Co., 60.0
2. Pawat Vitoorapakorn 3.3
3. Teerawat Vitoorapakorn 2.3
PRICE PERFORMANCE (%)
1MTH 3MTH 1YR
ABS 10% 53% 69%
REL TO SET INDEX 8% 68% 108%
PRICE VS SET INDEX
Source: Bloomberg, PSR
KEY FINANCIALS
FYE Mar FY15 FY16E FY17E FY18E
Sales(Btmn) 6,913 8,795 11,164 13,381
Net Profit(Btmn) 629 1,539 2,031 2,698
EPS (Bt) 0.27 0.55 0.73 0.96
P/E (X) 51.9 25.5 19.3 14.5
BVPS (Bt) 2.93 3.39 4.01 4.83
P/B (X) 4.8 4.1 3.5 2.9
DPS (Bt) 0.08 0.16 0.22 0.29
Dividend Yield (%) 0.6 1.2 1.6 2.1
ROE (%) 10.50 17.41 19.63 21.82
Debt/Equity (X) 0.79 0.69 0.59 0.48
Source: Company, PSR Est.
**Multiples and yields are based on latest closing price
VALUATION METHOD
PE'58/59 25x (g=25%)
Danai Tunyaphisitchai, CFA
Capital Market Investment Analyst # 2375
Tel: 66 2 635 1700 # 481
Thanatphat Suksrichavalit
Assistant Analyst
03 February 2016
39,200
1,097
27 November 2015
Neutral
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Feb‐13 Feb‐14 Feb‐15 Feb‐16
EPG TB EQUITY SETI (rebased)
Eastern Polymer Group
Thailand’s leader in polymer & plastic conversion innovations
THAILAND | SET | CONMAT | INITIATION OF COVERAGE BLOOMBERG EPG TB l REUTERS EPG.BK
Thailand’s leader in polymer & plastic conversion innovations EPG is a holding company mainly investing in innovative polymer and plastic conversion business. Most of its revenue comes from the following three wholly owned subsidiaries: (1) Aeroflex (AFC), a producer of thermal insulation, (2) Aeroklas (ARK), a manufacturer and supplier of auto parts and accessories and (3) Eastern Polypack (EPP), which is engaged in the packing business. Note that all subsidiaries are involved in the conversion of downstream plastic pellets into products for various industries both at home and abroad and reaped the benefit of a recent drop in oil prices. In addition, innovations and patents for the development of products made from polymers and plastics have also kept EPG in front and stay competitive in the global arena. ARK set to be a rising star in the next three years ARK is a OEM,ODM and REM manufactuer and distributor of auto parts and accessories. The product design and development will be carried out by Aeroklas under its patents. Its product offerings are parts of pick‐up trucks including the likes of bed liner, canopy and side step, the latest product supplied directly to Ford. Last year Aeroklas acquired a 100% stake in TJM, a well‐known supplier of offroad accessories in Australia. With TJM, there is potential for Aeroklas to see explosive growth in the next three years. 2QFY15/16 net profit up 47.45% q‐q and 198.88% y‐y to Bt424.3mn helped by the benefit of lower oil prices EPG delivered a strong set of financial results in 2QFY15/16 ending Sep 2015. For the period, net profit clocked in at Bt424.3mn, up 47.45% q‐q and 198.88% y‐y. Total revenue leapt 35.42% y‐y on the back of a strong showing from Aeroklas helped by revenue contribution from the recently acquired TJM. Total costs rose at slower pace than revenue at 20.32% y‐y thanks to a retreat in raw material costs along with oil prices and production economy of scale. For the whole of FY15/16, we expect its earnings to be strong driven by direct parts orders from automaker during the year and growth from TJM. Our forecast puts its FY15/16 net profit at Bt1,539mn or Bt0.55/share, up 103.57% y‐y. Initiation of coverage with ‘NEUTRAL’ rating and FY15/16 target price of Bt14/share We set a FY15/16 target price of Bt15/share for EPG. The target is based on a PEG of 1x assuming a profit CAGR of 25% over the next three years. Even though much of its fundamental value appears to have already been reflected in the current share price, its long‐term growth profile however looks promising as there remains scope for EPG to pull in more orders from other automakers in Thailand, which is the world’s biggest production base for pick‐up trucks and the expansion of TJM should keep growth rolling along the road ahead. At the end of the day, we initiate our coverage of EPG with a ‘NEUTRAL’ rating.
Ref. No.: CO2016_0097
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Eastern Polymer Group INITIATION OF COVERAGE
Investment Thesis 1. EPG is a holding company mainly investing in downstream plastic conversion for various
industries. The benefit of a recent drop in oil prices also gave margins a lift. 2. The acquisition of TJM in Australia has opened up more business opportunities for ARK
through its own distribution channel. Direct parts orders from domestic automaker Ford has also left room for ARK to pull in more orders from other carmakers, pointing to strong growth outlook ahead. Growth prospects also remain strong for AFC and EPP. Our forecast puts EPG’s FY15‐16 total sales growth at 25.3% y‐y while total costs are expected to rise at a slower pace than sales at a mere 13.1% y‐y.
3. We set a FY15/16 target price of Bt14/share for EPG. The target is based on a PEG of 1x, assuming an explosive earnings growth over the next three years at a CAGR of 25%. We initiate our coverage of EPG with a ‘NEUTRAL ‘rating as much of its fundamental value appears to have already been reflected in the current share price.
Business overview EPG is a holding company mainly investing in innovative polymer and plastic conversion business. Most of its revenue comes from the following three wholly owned subsidiaries: (1) Aeroflex (AFC), a producer of thermal insulation, (2) Aeroklas (ARK), a manufacturer and supplier of auto parts and accessories, and (3) Eastern Polypack (EPP), which is engaged in the packing business. AFC, the world’s third largest producer of thermal insulation AFC is the world’s third largest producer of insulation. Its key product is thermal insulation. AFC is also the only producer that has developed a special type of insulation made from Ethylene Propylene Diene Methylene (EPDM) after a long period of R&D. Its superior technology provides several advantages over its competitors. Its insulation rubber can withstand temperature range from ‐200C to 125C and strong humidity with weather condition resistance and environmentally friendly properties.Its rubber insulations are extensively used to keep temperature in air‐conditioning industry as an insulation for air conducting system, indoor chilled/hot water pipings. In addition, it can also be applied as acoustic absorber to reduce noised generated by equipment, air movement and the expansion and contraction noise of sheet metal duct. In 2014, AFC captured a 65% share of the domestic insulation market in Thailand. Domesic sales contributed 30% of its total revenue and the rest from overseas sales. AFC had a 10% share of the global insulation market behind only Armacell (America) and K‐Flex (Italy) which produced Nitrile Butadiene Rubber (NBR) insulations. However, special characteristics of EPDM insulations and various global patents make AFC’s products competitive especially among price‐insensitive clients as part of the efforts to avoid price war and keep margins high. Figure 1: Aeroflex’s thermal insulation
Source: EPG Construction industry still in strong growth mode in Asia Demand for thermal insulation products is closely tied to growth in the global construction industry which is forecast to grow at an average annual clip of 4.1% and value at up to US$10.4trn in 2018, according to Business Monitor and EPG. The construction industry in Asia is expected to grow the most among other regions at 5%, well above the global industry’s average.
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Eastern Polymer Group INITIATION OF COVERAGEARK, a global leading supplier of auto parts and accessories ARK is the world leading manufacturer and supplier of auto parts and accessories. It operates as an original equipment manufactuer (OEM)/original design manufacturer (ODM) and replacement equipment manufactuer (REM) under the ‘AEROKLAS’ brand. The design and development of products are based on its own patents. Its product offersings are parts of pick‐up trucks or SUVs including the likes of bed liner, canopy and deck cover. Figure 2: Aeroklas’s auto parts and accessories
Source: EPG Acquisition of TJM to bring its former glory back to life In 2015, ARK acquired a 100% stake in TJM, a well‐known supplier of offroad accessories in Australia. TJM is a top two player in the Australian car accessories market in terms of sales and it has well established sales channels with 58 branded distributors and 27 licensed stores across Australia, allowing ARK to take advantage of its sales channels to expand its presence into Australia. In 1HFY15/16, ARK earned revenue of Bt468.4mn. Figure 3: TJM branded branch in Australia Source: TJM Stable revenue growth profile with product acceptance from carmaker ARK of late supplied side step to one of the global car brands Ford in Thailand. Side step is one of the key components in the assembly of its latest car model launched last year. With ODM production, margins are higher than those of OEM production. Direct orders from Ford has given ARK room for further growth and enhances its revenue stability throughout the production cycle of each car model which normally lasts 5‐8 years in addition to car accessories business. Currently ARK has more than 300 clients in its car accessories business, reflecting the acceptance of product quality and increasing opportunities for ARK to receive new orders from other clients. EPP, a leader in disposable plastic packaging for food and beverage with state‐of‐the‐art technology EPP is a high‐quality manufacturer and distributor of disposable plastic packaging for food and beverage such as drinking cups, plates and bowls. Its products are of higher quality with unique design from its competitors. EPP counts McDonald, KFC, Yam Yam and CP as its major clients. Its products are also distributed through more than 200 sale agents in Thailand and exported to overseas markets i.e. Australia, Singapore and Myanmar.
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Eastern Polymer Group INITIATION OF COVERAGEFigure 4: EPP products
Source: EPG One of the EPP’s major products are plastic sheets used as raw materials in forming into products for various industries, mostly construction and automotive accessories. Figure 5: Correlation between packaging consumption in F&B industry and global GDP
Sources: World Bank, EPG The chart shows that average growth in the F&B packaging market has outstripped global GDP growth, leaving rooom for EPP to grow ahead amid a steady rise in demand. EPP has a 10%‐15% share of the F&B packaging market in Asia and it retains its position as the number one leader in the domestic F&B packaging market with a market share of 35%‐40%. JV with Japan’s producers of automotive rubber parts EPG also earns revenue from JV with Japanese Automotive part supplier i) Sumitomo Rico of Japan, one of the world’s biggest producers of automotive anti‐vibration rubber parts.It has a 20% stake in Tokai Eastern Rubber (Thailand) Co (TER), a JV with Sumitomo Rico, which produces shock absorbing rubber and fuel hoses for motorcycles and vehicles for distribution in Thailand and Japan. ii) EPG also owns a 27% stake in Zeon Advanced Polymix Co (ZAP), a producer and distributor of rubber compound for natural and artificial rubber used in various industries i.e. anti‐vibration rubber, seals, car doors including rubber parts used in construction site. Its investments in JVs generated profits of up to Bt229.1mn to EPG in FY14/15. Profits from JVs also came in at Bt121.9mn in 1HFY15/16. The prospect of a pickup in the auto industry also reflects more growth potential for JVs. R&D key to business growth EPG has continued to place greater importance on R&D as it has a clear policy to set aside 1% of its total sales for R&D. The continued launch of new products onto the market including Aeroroof, a thermal insulation for roof and full box set in car accessories business, which add value to its products, has also enhanced EPG’s competitive advantage in the long run.
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Eastern Polymer Group INITIATION OF COVERAGE Revenue structure The following is a revenue breakdown by business over the past three years. Figure 6: Revenue breakdown
Revenue(Btmn) Apr12-Mar13 %
Apr13-Mar14 %
Apr14-Mar15 %
Apr15-Mar16 %
Y12/13 Y13/14 Y14/15 1H15/16 Aeroflex 2,043.9 30.3% 2,133.6 32.4% 2,295.2 33.2% 1,334.7 30.7% Aeroklas 2,590.2 38.4% 2,281.5 34.6% 2,404.8 34.8% 1,717.9 39.6% Eastern Polypack 2,116.1 31.3% 2,176.7 33.0% 2,212.7 32.0% 1,290.4 29.7% Total 6,750.2 100.0% 6,591.8 100.0% 6,912.8 100.0% 4,343.1 100.0% Source: PSR,EPG 2QFY15/16 net profit up 47.45% q‐q and 198.88% y‐y to Bt424.3mn helped by the benefit of lower oil prices EPG delivered a strong set of financial results in 2QFY15/16 ending Sep 2015. For the period, net profit clocked in at Bt424.3mn, up 47.45% q‐q and 198.88% y‐y. Side step orders from Ford led ARK to achieved revenue growth of up to 41.4%. For 1HFY15/16, its net profit came in at Bt712.1mn, up 135.9% from Bt301.8mn in 1HFY14/15 as sales grew 25.3% y‐y and cost of sales rose at a slower pace than sales at a mere 13.1% y‐y, benefiting from lower raw materials prices and production economies of scale on the back of higher operating run rates. Falling oil prices a boon for EPG Falling oil prices pushed prices of plastic pellets, EPG’s raw materials lower, giving a big boost to its gross and net profit margins from 4QFY14/15 onwards. In 2015, oil prices fell precipitously to US$40/barrel from US$60/barrel. Figure 7: EPG profitability metrics
Source: PSR,EPG Solid financial profile puts EPG in position to cash in on future growth Following market listing on Dec 24, 2014, its D/E ratio dropped sharply to 0.5x in FY14/15 from 1.9x in FY13/14 as part of the IPO proceeds was used to pay back some interest‐bearing debt and fund its future investments. FY15/16 net profit seen at Bt1,539mn, up 103.57% y‐y Explosive earnings growth is expected in the next three years according to EPG’s growth strategy. ARK would act as a key growth catalyst for EPG. In 2QFY15/16, ARK achieved revenue growth of 19.1% q‐q and 61.4% y‐y boosted by new orders and revenue
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Eastern Polymer Group INITIATION OF COVERAGEcontribution from JTM. For the whole of FY15/16, we expect EPG to deliver net profit of Bt1,545mn. The forecast is based on the following assumptions: (1) Full‐year total sales will grow 25.3% y‐y on the back of growth in car accessorieis
business run by ARK following the consolidation of TJM with revenue growth of at least 20% a year and direct orders from Ford which would be gradually realized as revenue over the remaining course of the year. By our estimate, we see scope for ASK to achieve revenue growth of 50% y‐y. For AFC and EPP, we assume revenue growth of 15% and 20% y‐y respectively.
(2) Cost of sales will rise 13.1% y‐y, benefiting from lower raw materials costs and production economies of scale on the back of higher operating run rates.
The 1HFY15/16 net profit of Bt712.1mn accounted for only 46.27% of our full‐year target as TJM was still in the process of organizational restructuring when SG&A expenses remained high and profits dropped and orders from Ford just came in during 2QFY15/16. As the above headwinds are likely to be only temporary, we expect EPG’s earnings growth to be strong in 2HFY15/16. Initiation of coverage with ‘NEUTRAL’ rating and FY15/16 target price of Bt14/share We set a FY15/16 target price of Bt14/share for EPG. The target is based on a PEG of 1x assuming a profit CAGR of 25% over the next three years. Even though much of its fundamental value appears to have already been reflected in the current share price, its long‐term growth profile however looks promising as there remains scope for EPG to pull in more orders from other automakers in Thailand, which is the world’s biggest production base for pick‐up trucks and the expansion of TJM should keep growth rolling along the road ahead. At the end of the day, we initiate our coverage of EPG with a ‘NEUTRAL’ rating. Risk factors 1. Swings in raw materials prices 2. FX volatility 3. Rapid technology changes 4. Dependence on highly volatile construction and auto industries
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Eastern Polymer Group INITIATION OF COVERAGE
Financials
Income Statement Cash Flow
FYE Mar, Btmn FY15 FY16E FY17E FY18E FYE Mar, Btmn FY15 FY16E FY17E FY18E
CPR EIC FER JMART JMT KAMART KBS KIAT LDC MCS METCO
MBAX NEW NEWS NYT PAE PDG PERM PMTA RCL RICHY ROH
POST S SIMAT TCB TR TSF TVT
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Eastern Polymer Group INITIATION OF COVERAGE
Anti‐corruption indicators
Level 5 : Extended
Anti‐corruption policies extend to business partners, dealers, and distributors.
Level 4 : Certified
Anti‐corruption policies can be engaged by audit committee and auditors approved by the SEC.
Anti‐corruption policies are certified by CAC and independent assurance providers.
Level 3 : Established
Anti‐corruption corruption policies cover anti‐bribery, and communications and educating all employees anti‐corruption policies.
Level 3A Public out statement to join CAC, etc.
Level 3B Declare statement and organization’s anti‐corruption policies but no intention to join CAC, etc.
Level 2 : Declared
Declare statement to participate CAC against corruption.
Level 1 : Committed
Organization and Board of Directors’ statements against corruption and not getting involve in any malpractices.
Assessment
Anti‐corruption progress indicator for listed companies is a part of SEC’s commitment to create sustainability in anti‐corruption and to become a role model to any
related business. The progress indicators comprise of five levels: 1) Committed, 2) Declared, 3) Established, 4) Certified, and 5) Extended. These indicators will
encourage listed firms to formulate anti‐corruption policies to opt out of corruption, and investors can determine their investment based on anti‐corruption indicator
or avoid investment in listed firms that could get involve in corruption.
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Corporate Governance ‐2015
ADVANC BAFS BCP BIGC BTS CK CPN DRT DTAC DTC
EASTW EGCO GRAMMY HANA HMPRO INTUCH IRPC IVL KBANK KCE
KKP KTB LHBANK LPN MCOT MINT MONO NKI PHOL PPS
PS PSL PTT PTTEP PTTGC QTC RATCH ROBINS SAMART SAMTEL
SAT SC SCB SCC SE‐ED SIM SNC SPALI THCOM TISCO
TKT TMB TOP VGI WACOAL
AAV ACAP AGE AHC AKP AMATA ANAN AOT APCS ARIP
ASIMAR ASK ASP BANPU BAY BBL BDMS BECL BKI BLA
BMCL BOL BROOK BWG CENTEL CFRESH CHO CIMBT CM CNT
COL CPF CPI CSL DCC DELTA DEMCO ECF EE ERW
GBX GC GFPT GLOBAL GUNKUL HEMRAJ HOTPOT HYDRO ICC ICHI
Phi s anulok 2nd Fl ., Tha i Si va ra t Bldg., Te l : 0 5524 3646
Had Ya i 4th Fl ., Southla nd Rubber Bldg., Te l : 0 7423 4095‐99110
Had Ya i ‐ Pe tka s em 3rd Fl ., Uni t 3D, Reda r Group Bldg., Te l : 0 7422 3044
La emchabang 53/112, 53/114 Moo 9, Tungsukl a , Sri ra cha , Chonburi 20230
Chumporn Inves tor Cente r 25/45 Krom Luang Chumporn Rd.,Te l : 0 7757 0652‐3
Overseas OfficesSINGAPORE Phi l l i p Securi ti e s Pte Ltd Ra ffl e s Ci ty Tower Te l : (65) 6533 6001 www.poems .com.s g
HONG KONG Phi l l i p Securi ti e s (HK) Ltd 11/F Uni ted Centre 95 Queensway, Te l (852) 22776600 www.phi l l i p .com.hk
MALAYSIA Phi l l i p Capi ta l Management Sdn Bhd, Block B Leve l 3 Megan Avenue Te l (603) 21628841 www.poems .com.my
JAPAN Phi l l i p Securi ti e s Japan, Ltd 4‐2 Nihonba shi Kabuto ‐cho, Chuo ‐ku, Tokyo Te l (81‐3) 36662101
INDONESIA PT Phi l l i p Securi ti e s Indones i a ANZ Tower Leve l 23B, Te l (62‐21) 57900800 www.phi l l i p .co.i d
CHINA Phi l l i p Financi a l Advi s ory (Shangha i ) Co. Ltd Ocean Tower Uni t 2318 Te l (86‐21) 51699200 www.phi l l i p .com.cn
FRANCE King & Sha xson Capi ta l Limi ted 3rd Fl r, 35 Rue de l a Bienfa i s ance Te l (33‐1) 45633100
UNITED KINGDOM King & Sha xson Capi ta l Limi ted 6th Fl r, Candlewi ck House , Te l (44‐20) 7426 5950 www.kingandsha xson.com
UNITED STATES Phi l l i p Futures Inc The Chi ca go Boa rd of Trade Bui l di ng Te l +1.312.356.9000
AUSTRALIA Phi l l i pCapi ta l Aus tra l i a Leve l 37, Col l i ns Stree t, Melbourne , Te l (613) 96298380 Fwww.phi l l i pca pi ta l .com.au
SRI LANKA Asha Phi l l i p Securi ti e s Ltd Leve l 4, Mi l l ennium House , Te l : (+94) 11 2429 100 aps l@ashaphi l l i p .ne t
TURKEY Hak Menkul Ki ymetl e r A.Ş Dr.Cemi l Bengü Cad. Te l : (+90) (212) 296 84 84 (pbx) a kmenkul@hakmenkul .com.tr
INDIA Phi l l i pCapi ta l (India ) Pri va te Limi ted No. 1, C‐ Block, 2nd Floor,Modern Cente r , Ja cob Ci rcl e , K. K. Marg,
Maha l a xmi Mumba i 400011 Te l : (9122) 2300 2999 Webs i te : www.phi l l i pca pi ta l .i n
DUBAI Phi l l i pCapi ta l (India ) Pvt Ltd.601, Whi te Crown Bui ld i ng Duba i UAE. Maha la xmi Mumba i 400011
Te l : (9122) 2300 2999 Webs i te : www.phi l l i pca pi ta l .i n
CAMBODIA Bui ld i ng No71, St 163, Sangka t Toul Sva y Prey I , Khan Chamka rmorn, Phnom Penh, Kingdom of Cambodia
Te l : (855) 23 217 942 Webs i te : www.kredi t.com.kh
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