EPG - Maintain Neutral view after recent selloff

EPG share price fell 16% over the past three months, underperforming the SET’s fall of 3%, on a drop in earnings from provisions against expected credit loss (ECL) caused by a joint venture in South Africa. There could be more ECL in 3QFY25, but we believe this is largely priced in given the 17% fall in share price over the last few days. Even so, investors are likely to be uninterested until the drag from ECL ends. We slash our FY2025 another 11% to reflect actual and potential ECL. This does not affect TP (end-2025) of Bt5.20, based on 10.6x PE (-2SD). Neutral.

2QFY25 recap. EPG reported net profit of Bt130mn, down 70% YoY and 49% QoQ, hurt by FX loss of Bt200mn and expected credit loss (ECL) of Bt97mn. Core profit was Bt395mn, up 14% QoQ on higher gross margin for insulation (+5.3ppt) and packaging segments (+3.5ppt), while automotive margin slipped to 32.3% from 33.2% in 1QFY25 on loss contribution from TJM. Sales revenue rose 9% YoY and 1% QoQ on 14% growth in the automotive segment due to new orders from a Japanese automaker for its lightweight products. Cumulative net profit for 6MFY25 was Bt384mn, down 48% YoY, while core profit rose 2% YoY. EPG announced an interim dividend of Bt0.06/share, equivalent to 43.8% payout.

1HFY25 revenue growth in line FY2025 target. Management kept its FY2025 revenue growth target of 8-10% (~Bt14bn) with a gross margin of 30-33%. Rubber insulation continues to shore up margin (43-45%), while automotive parts and accessories production and distribution will drive sales revenue (up 10-12% YoY). Plastic packaging manufacturing and distribution may be relatively flat due to high competition, but the company has industry standards to protect against competition in the premium market.

JV in South Africa still a pain in the neck. The business of the JV in South Africa (ATD alliance) is gradually improving with profit contribution of Bt7.8mn in 2QFY25, but payment for raw material from EPG subsidiary ARK remains iffy. We expect additional ECL of ~Bt100mn in 3QFY25. EPG says it will make no additional investment or add product lines to supply ATD until the production and supply chain issues at ATD are resolved.

Positive on the new US president tax policies. Management is optimistic about the incoming US president’s tax policy, which it expects to be a net positive for its business in the US, as lower corporate taxes outweigh higher import duties on semi-finished raw materials, while demand for EPDM insulation is likely to grow due to the increase in semiconductor, data center and EV manufacturing plants. The company also expects demand for EPDM insulation for air conditioning duct systems to continue to grow in the US.

Another FY2025 cut. We slash our FY2025 net profit by 11% to reflect provisions for ECL but maintain our core profit projection. We keep our Neutral rating as there is no new share catalyst. This does not affect TP of Bt5.20, based on -2SD P/E of 10.6x (end-2025). We expect the ECL issue to gradually improve as liquidity and production issues at JV in South Africa are being resolved.

Risks & concerns: A slow economy that may hurt demand for EPG products and consequently its revenue, and rising prices for key feedstock. We see ESG risk as effective environmental management (E).