Background

Incorporated in 2000, EPB Group Berhad (EPB) is a one-stop solutions provider specialising in food processing and packaging machines.

IPO Statistic

The IPO entails a public issue of 71.57mn new shares and an offer of sale of 40.0mn existing shares. Collectively, the share offers account for 30.0% of the group’s enlarged issued share capital.

Competitive Advantages

1. One Stop Solutions Provider for Food Processing and Packaging Machinery;
2. Experienced Management Team with In-depth Knowledge; and
3. Compliance with Internationally Recognised Quality Standards.

Valuation

With an IPO price of RM0.56/share, EPB is priced at a PE of 13.9x against its FY23 EPS. We gathered that EPB’s peers in Malaysia are mainly privately owned. Therefore, we apply a PE ratio of 14x to it FY25 EPS, which represents an approximately 20% discount compared to the average PE of 18.0x among its regional peers due to its much smaller market capitalisation. This results in a target price of RM0.77/share. The valuation takes in to account the growing demand for processed food, customer intentions to shift towards automated solutions, and expansion to overseas market, especially in the Philippines and Indonesia. Meanwhile, we believe the earnings will be backed by a decent margin from turnkey projects for food processing and packaging machinery solutions, with historical gross margin stabilising around 30% since 2020. Not Rated.

Business Overview

EPB Group Berhad is a one-stop solutions provider of food processing and packaging machinery. The group is engaged in design, customisation, fabrication, integration and automation of food production lines for the food manufacturing and processing companies. Meanwhile, the group also supplies cellulose casing and flexible packaging materials to its customers.

Investment Thesis

1) One Stop Solutions Provider for Food Processing and Packaging Machinery

EPB group is the first listed firm in Malaysia that offers turnkey solutions for food processing and packaging machinery. From the outset, the group designs and customises production flows to fit the industrial layout, integrating food processing and packaging machines that are either made inhouse or imported. Once the installation is completed, clients can take advantage of after-sales services.

Overall, EPB competes in all phases under one roof. Incorporated since 2000, the food processing and packaging machinery solutions segment significantly contributes to the group’s topline, accounting for approximately 80% of total revenue. Additionally, the group also trades cellulose casings and flexible packaging materials.

2) Experienced Management Team With In-Depth Knowledge

EPB is led by a management team with over 30 years of experience in food packaging automation. Their extensive knowledge enables them to thoroughly understand the dynamics of the industry. The team’s expertise in fabricating and integrating machinery allows them to offer cost-effective, customised machinery solutions to their customers.

With years of industry experience, the group maintains close collaboration with clients, assisting them in commercialise their products and reducing time-to-market. In FY23, the group served over 630 customers in the food processing and packaging machinery solutions business segment, demonstrating a broad customer base. Going forward, we believe customers will continue to rely on the group for solutions that offer greater efficiency.

3) Compliance With Internationally Recognised Quality Standards

Over the years, the organisation has established a Quality Management System (QMS) aligned with internationally recognised standards for food packaging and processing machinery. The group adheres to the ISO 9001:2015 Quality Management System for the design and manufacturing of food packaging and processing machinery. Additionally, the group is certified to produce and manage ice-making machines and refrigeration systems, ensuring comprehensive service offerings. This rigorous adherence to quality standards bolsters client confidence, thereby enhancing EPB’s competitiveness within the market.

Future Plans and Business Strategies

1) Expand Its Presence in Penang

EPB plans to expand its presence in Pulau Pinang by establishing a corporate office and a factory building with a total built-up area of 70,000 sf. As of FY23, the group owns one plant with an existing built-up area of 28,355s.f., located at Penang Science Park. Going forward, the group plans to expand their existing factory building by approximately 83% to 52,000 sf. A portion of the land (18,000 sf.) will be utilised as a showroom and warehouse, allowing the group to display their machinery and store raw materials as well as finished goods. Overall, the new factory building will enhance the production of food processing and packaging machinery.

2) Shift Towards Automated Food Packaging and Machinery Solutions

To reduce the reliance on human workers and stay abreast of market trend, the group will allocate 21.2% of the total IPO proceeds to develop machinery solutions integrated with automation and robotics technology. Supported by the growing market size of the F&B Processing Machinery Industry, the group believes that integrating robotic technology will attract new customers and retain existing clients, particularly those who are seeking automated solutions to transform their food manufacturing process towards industrial revolution 4.0.

Key Risks Relating to Business and Industry

i. Adverse fluctuations in the MYR/USD foreign exchange rate
ii. Volatility in prices of stainless steel and aluminum.
iii. Reliance on foreign labours.

Outlook

According to independent market research (IMR), F&B services activities contributed RM36.2bn to the real gross domestic product (GDP), representing a 2.5% YoY growth in CY23. Meanwhile, the GDP contribution from food processing and beverage manufacturing grew by 4.7% YoY growth to RM28.4bn, bolstered by a strong present in the local F&B industry. Protege projects Malaysia’s food processing and packaging industry to grow at a CAGR of 10.4% from 2024 to 2028. This projection is supported by higher demand for convenient processed food, adoption of automated machineries, and government support for developing local food-related industries.

In FY21, earnings surged 89.3% YoY to RM11.9mn due to improved gross profit and reduced selling and distribution expenses. Meanwhile, the profit after tax (PAT) margin rose by 5.6%-pts to 15.8% in FY21, benefiting from enhanced earnings and controlled cost. Despite achieving positive result in FY21, FY22 and FY23 saw a decline in PAT margin attributable to higher distribution cost as well as increased administrative cost. Selling and distribution cost increased sharply to RM7.7mn (+110.2% YoY) and RM10.5mn (37.1% YoY) in FY22 and FY23, respectively. This increase was driven by the group’s active participation in trade fairs and exhibitions in Indonesia and Philippines to boost the group’s revenue.

Going forward, we estimate sales growth for FY24/25/26 to be 10.0%/12.0%/15.0%, driven by the growing market size of the food processing and packaging machinery industry. Coupled with heightened demand from the food manufacturing and processing machinery amid cost control, we anticipate net profit to rise by 15.3%/24.9%/18.5% in FY24/25/26, respectively.

Overall, our FY24-26 projections are based on the following key assumptions:

• We expect the demand for food manufacturing and processing machinery to increase due to the ongoing industrial revolution 4.0 trend, where automated solutions are increasingly demanded.
   
• PAT margin improved to 12.2%/13.6%/14.1% in FY24/25/26, respectively, as a result of effective cost optimisation strategies.
   
• Expansion in Penang with the construction of a new factory facility and a corporate office to cater for future demand.

Balance Sheet

The pro forma net gearing ratio is expected to decline from 0.07x to 0.01x after the listing, with the IPO proceeds being utilised.

Dividend Policy

EPB does not have a formal dividend policy. However, the board intends to distribute at least 25% of the consolidated profit after tax (PAT) over the next 3 financial years. This translates to a dividend yield of 2.0%/2.5%/2.9% for FY24/25/26, respectively.

Valuation

With an IPO price of RM0.56/share, EPB is priced at a PE of 13.9x against its FY23 EPS. We gathered that EPB’s peers in Malaysia are mainly privately owned. Therefore, we apply a PE ratio of 14x to it FY25 EPS, which represents an approximately 20% discount compared to the average PE of 18.0x among its regional peers due to its much smaller market capitalisation. This results in a target price of RM0.77/share. The valuation takes in to account the growing demand for processed food, customer intentions to shift towards automated solutions, and expansion to overseas market, especially in the Philippines and Indonesia. Meanwhile, we believe the earnings will be backed by a decent margin from turnkey projects for food processing and packaging machinery solutions, with historical gross margin stabilising around 30% since 2020. Not Rated.

Source: TA Research - 29 Jul 2024