Valuation / Recommendation

We have a SUBSCRIBE call on EPB Group (EPB) with RM0.75 FV based on 16x FY25F EPS, which suggests a potential upside of 34% to the IPO price. Our target PE is slightly lower than comparable global peers’ average PE of 17.1x, taking into account EPB’s much smaller market capitalisation but mitigated by its stronger earnings growth. We like the stock for its strategic exposure to high-grow markets like the Philippines and Indonesia, as well as solid balance sheet with net cash position.

Investment Highlights

Strategic overseas exposure. Approximately 70% of EPB’s FY23 sales came from overseas, with a strategic focus on two of Asia's fastest- growing markets: the Philippines and Indonesia. Revenue from overseas (mainly from these two countries) has increased significantly, more than doubling from RM35.7m in FY20 to RM85.1m in FY23. These countries are not just large in population but also growing rapidly in terms of economic growth and consumer spending. The governments of these nations are also prioritising the food processing sector, making it an opportune time for EPB to expand. EPB’s overseas exposure is not limited to just these two countries; the group also has sales to customers in the USA, Myanmar, and Algeria, which contributed 7-10% of its sales.

Adding new floor space. EPB is suffering bottlenecks at its current Plant 1 facility due to the increasing scale and complexity of its machinery solutions, which require more floor space to construct. To address this, the group plans to use 61% of the RM40.0m IPO proceeds to buy industrial land and build new facilities, including a 52,000 sq ft factory, an 18,000 sq ft corporate office, a warehouse, and a showroom. This expansion will improve production flow, boost capacity, and allow the showroom to showcase machinery to clients, enhancing engagement and driving sales.

Steady margins. EPB has maintained a stable gross margin of 33-34% over the past four years, attributed to effective cost management, a smart pricing strategy, and high customisation of its food processing machinery solutions. After the COVID-19 pandemic, EPB experienced a surge in machinery sales in FY21-22, but without a substantial increase in selling and distribution expenses. This, coupled with a lower effective tax rate, led to higher PAT margins in FY21-22. Looking ahead, amid higher taxation, we expect EPB’s PAT margins to stabilise around 11-12% for FY24-26F.

Risk factors for EPB include (1) Dependency on key suppliers, (2) Fluctuations in raw materials prices, and (3) Forex risk.

Source: Mercury Securities Research - 26 Jul 2024