• MYR0.65 FV based on 16x FY25F P/E, with c.2% FY25F yield. EPB Group intends to raise MYR40.1m from its IPO, mainly to fund its factory expansion plan, working capital, and for the repayment of bank borrowings. Our 16x P/E target was obtained after benchmarking against the Bursa Malaysia Industrial Products and Services (KLPRO) index. Our 3-year earnings CAGR of 7% is premised on the growing preference for convenient processed food products, as well as the growing adoption of industrial automation.

• One-stop provider of food processing and packaging machinery solutions. EPB is involved in the design, customisation, fabrication, integration, and automation of production lines for food manufacturing and processing companies. It is also involved in the trading of cellulose casings and the manufacturing and trading of flexible packaging materials. The largest segment (food processing and packaging machinery) made up 82% of FY23 revenue.

• Expansion plans. EPB has earmarked MYR24.6m of its IPO proceeds for the expansion of its production facilities in Penang. This involves the acquisition of new land, construction of a factory, warehouse, and showroom, as well as purchase of new machinery. The proposed expansion would enhance EPB’s production capabilities for the business segment to meet expected future demand growth, as well as to reduce turnaround time in the event that it secures multiple large orders at the same time.

• Forecasts. We expect revenue to grow at a 3-year CAGR of 5%, mainly driven by the food processing segment, which we expect will expand at a CAGR of 5%. For FY24, we anticipate core earnings to be weaker YoY across all segments. The weakness was reflected in its 1Q24 earnings of MYR1.3m, which translated to annualised earnings of MYR5.2m. We understand from management that this is due to the timing of revenue recognition, which is expected to occur mainly in 2H. While we expect FY24 earnings to weaken slightly by 7.5%, we forecast a modest 3-year earnings CAGR of 7% on the back of growing preference for convenient processed food products, as well as the growing adoption of industrial automation.

• Valuation. We ascribe a 16x P/E to the group’s FY25F earnings to arrive at the MYR0.65 FV. Our target PE is in line with the 5-year historical mean P/E of the KLPRO Index of 16x. We believe this target P/E – which is slightly above EPB’s FY23 trading P/E (based on the IPO price) of 14.6x – is justified, considering the forecasted 3-year earnings CAGR of 7%, reasonable expansion plans, and healthy net cash position. We also benchmark the target P/E against the KLPRO Index, considering the nature of EPB’s business, which falls under the industrial segment.

• Key risks include weaker-than-expected orders from existing and prospective customers, adverse fluctuations in raw material prices, and FX rates.

Source: RHB Securities Research - 30 Jul 2024