TRIS Rating has assigned the company rating of Eastern Printing PLC (EPCO) at “BBB” with “stable” outlook. The rating reflects EPCO’s firm position and lengthy track record in the printing industry, its steady profitability of core business albeit limited prospects for growth, diversification into a new business of producing renewable energy, and more predictable cash flows derived from its wholly-owned solar power companies. These strengths are partially offset by the poor outlook for the printing industry, a short track of solar power business, and the execution risks in the new segment, as well as a rising level of debt to fund its growth opportunities.
The “stable” outlook reflects TRIS Rating’s expectation that EPCO will maintain its strong market position in the printing segment and that this segment will remain profitable. The outlook also embeds our expectation that EPCO will realize sizable and sustainable cash flow from the solar power segment. Further, EPCO is expected to successfully execute the upcoming solar power projects in Thailand and aboard, and earn satisfactory returns, without substantially deteriorating its capital structure.
Positive pressure on the rating could develop if the future expansion in solar power segment is successful, given tougher competition and lower tariffs on future projects. Conversely, downward pressure on the rating could emerge should EPCO fail to maintain its strengths in its core business or fail to achieve the recurring cash flows in the solar power segment. Each of these two unfavorable outcomes would lower EPCO’s profitability and raise its leverage from the current level, plus cause the debt to capitalization ratio to exceed 70% for sustained period.
EPCO was established in 1990 as a printing services provider. The company was listed on the Stock Exchange of Thailand (SET) in 1993. As of August 2015, Aqua Corporation PLC (AQUA) held approximately 38% of EPCO while the Chinsupakul family, the founder of the company, owned 17%. EPCO provides a full range of printing services, serving both domestic customers and customers abroad. EPCO prints newspapers, magazines, product manuals, educational books, calendars, and advertising materials.
The rating recognizes EPCO’s strong position as a leading local printing services provider, judging from revenues and EPCO’s broad range of products. Backed by its long presence and track record, EPCO can maintain multi-year relationships with its customers. With a robust base of customers, EPCO is able to gain profits despite poor prospects for the printing industry. The company has a gross margin higher than its peers. Revenue from the printing segment ranged from Bt600-Bt650 million per annum during 2004-2012 but fell to around Bt550 million per annum in 2013 and 2014. The market has shifted from traditional print toward digital media. On stand-alone basis, EPCO’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) was over 10% for the past two years, notwithstanding a steady decline in revenue.
The rating also incorporates the company’s advantageous diversification into renewable energy. In response to flagging demand for printing services, EPCO expanded into solar power business in 2012 primarily through its main subsidiary, Bor Ploi Solar Co., Ltd. (BP). BP launched two pilot solar farm projects in Kanchanaburi province. The contracted capacity of the two farms is 10 megawatts (MW). In 2013, the company added a solar farm project in Lopburi province, with a contracted capacity of five MW. All solar farm projects operate under the purchase of power from the Very Small Power Producer (VSPP) scheme, securing Power Purchase Agreements (PPA) with the Provincial Electricity Authority (PEA) and receiving government-subsidized tariff adder of Bt8 per kilowatt hour (kWh) for 10 years.
During 2014-2015, the company developed eight solar rooftop projects in Bangkok and Samut Prakan province, with a contracted capacity of 1.5 MW in aggregate. The solar rooftop projects have PPAs with the Metropolitan Electricity Authority (MEA) and obtain a favorable feed-in tariff (FiT) of Bt6.55 per kWh for 25 years. The diversification to renewable energy makes EPCO’s cash flow more stable and, most importantly, helps ensure earnings to keep growing. EPCO has recognized a stable income base since 2012. The expansion into solar power business caused EPCO’s revenue base to increase to more than Bt800 million in 2014, up from an average of Bt660 million during the five years earlier. EPCO’s operating margin declined steadily, falling from 22.8% in 2008 to 17% in 2012. The operating margin soared to 36% in 2013 and 43% in 2014 after EPCO diversified into solar power business. The company plans to invest in solar farm projects in Japan, with a total capacity of 48 MW. The total cost of the new projects abroad is Bt5-Bt6 billion, with construction period during 2016-2018.
EPCO’s rating is, however, partially offset by the weak outlook for the printing industry, due in part to dwindling demand for printing services. The industry is at the precipice of a significant change on account of stiff competition from digital media. The severity of the situation keeps the pressure on EPCO’s core business. The rating is also constrained by EPCO’s brief track record of its solar power business notwithstanding the use of proven photovoltaic (PV) technology. To ensure a sustainable output of power over the long haul, a solar power plant must be well-designed, use proven technology and certified equipment, operate efficiently, and employ timely maintenance practices. The performance of EPCO’s solar power segment is yet to be proven.
The rating is also weighed down by the execution risks in its current and forthcoming solar power projects, including availability of manpower and equipment to supervise and monitor the power production sites, technological risk which may rapidly change the cost structure, more competitors as a result of limited barrier to entry, regulatory issues such as the tariff scheme and government subsidiaries, as well as country risk inherent in operations aboard. The rating is further tempered by a rise in EPCO’s debt level as it borrows more to fund growth opportunities.
TRIS Rating’s base-case forecast expects EPCO’s revenues will be at least Bt800 million per annum during 2015-2018. The operating margin is expected to improve gradually to 50%. Operating income is expected to grow as a result of EPCO’s larger revenue base and more stable income from the solar power segment. The solar power segment has a high operating margin because of low operating expenses and a government subsidy in terms of a tariff adder. Funds from operations (FFO) are expected to total around Bt300-Bt400 million per annum.
EPCO’s investment plan for the solar power projects in Japan will raise its debt to equity ratio. Going forward, the company is expected to maintain debt to equity ratio below 2 times. Cash flow protection, as measured by the FFO to total debt ratio and the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio, is expected to weaken in the wake of the new debt-financed projects. However, these two ratios should remain consistent with the current rating. During 2015-2018, the FFO to total debt ratio is expected to stay around 18%, while the EBITDA interest coverage ratio will remain at 5-6 times. Total debt to capitalization ratio is expected to stay in a range of 60%-65% over the next three years.
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