TRIS Rating has affirmed the company rating of Eastern Printing PLC (EPCO) at “BBB” with “stable” outlook. The rating reflects EPCO’s solid market position and long track record in the printing industry, the profitability of the core business albeit the limited prospects for growth, diversification into power business, and more predictable cash flows derived from its subsidiary power company. These strengths are partially offset by the gloomy outlook for the printing industry, a short track of power business, and the execution risks in the power segment, as well as a rising level of debt needed to fund the growth opportunities.
The “stable” outlook reflects the expectation that EPCO will maintain its strong market position in the printing segment and that this segment will remain profitable. In addition, EPCO will realize sizable and sustainable cash flows from the power segment. Further, EPCO is expected to successfully execute the power projects in Thailand and abroad, and earn satisfactory returns, without substantially deteriorating its capital structure.
The credit upside could develop as EPCO builds a track record in the power segment with larger cash flow base, despite greater exposures to operational and country risks. 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 flow in the 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 a 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 September 2016, 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. EPCO has transitioned to focus heavily on the power business against the drop-off in printing revenue.
The rating recognizes EPCO’s strong market position as a leading local printing services provider due to its size and broad range of products. EPCO can maintain long-term relationships with its customers on the strength of its track record. The growth of digital media has depressed demand for printing services across the industry. As a result, EPCO’s revenue from printing segment steadily declined to about Bt550 million over the past three years, compared with Bt600-Bt650 million annually during 2004-2012. Although EPCO is expected to benefit from a nascent recovery in the printing industry in the last quarter of 2016, the opportunity is fleeting. Growth in printing revenue remains untenable over the long run. With a robust base of customers, EPCO is profitable and its gross margin is higher than peers. On a stand-alone basis, EPCO’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) was over 10% for the past three years, notwithstanding a steady decline in revenue.
The rating also incorporates the company’s advantageous diversification into the power industry. In response to flagging demand for printing services, EPCO has diverse into solar power business since 2012 primarily through its main subsidiary, Eastern Power Group PLC (EP), and recently expanded into cogeneration. EP launched two pilot solar farm projects in Kanchanaburi province in 2012. The contracted capacity of the two farms is 10 megawatts (MW). In 2013, the company added a 5 MW solar farm project in Lopburi province. During 2014-2015, the company developed eight solar rooftop projects in Bangkok and Samutprakan province, with a contracted capacity of 1.5 MW in aggregate. All solar farm and rooftop projects are in operations. Each project obtains favorable tariffs according to multi-year Power Purchase Agreements (PPAs) with the state-owned electricity distributors. During 2015-2016, EP acquired and developed a 9.9 MW solar farm project in Kyoto, Japan, at a cost of Bt1.03 billion. The project commenced operation in November 2016. EP acquired a 5 MW co-operative solar farm project in Prachinburi province, at a cost of Bt268 million. The project is scheduled to operate by the end of 2016.
In addition to the investment in solar power, EP recently pledged to invest up to Bt2.65 billion in two cogeneration power companies, a move that will shore up capacity and broaden the mix of energy that EP produces. EP has vowed to purchase 49.5% of the shares of PPTC Co., Ltd. (PPTC) and 30% of SSUT Co., Ltd. (SSUT). PPTC’s cogeneration power plant has been operational since March 2016. The plant has a capacity of 120 MW of electricity production and 30 ton per hour of steam. SSUT owns two plants with an aggregate capacity of 240 MW of power and 60 ton per hour of stream. SSUT’s full operations are scheduled by the end of 2016. The acquisitions are expected to pave the way for earnings growth as EP’s capacity will edge up to 131.4 megawatts equity (MWe) in aggregate.
The diversification to the power industry makes EPCO’s cash flow more stable and, most importantly, helps ensure earnings keep growing. EPCO’s income base has been stable since 2012. The expansion into solar power pushed revenue base above Bt800 million in 2014, up from an average of Bt660 million during the five years earlier. When it was a only printing company, EPCO’s operating margin declined steadily, falling from 22.8% in 2008 to 17% in 2012. The operating margin soared to 36%-44% during 2013-2015 after EPCO diversified into solar power.
EPCO’s rating is, however, partially offset by the gloomy outlook for the printing industry, due for the most part to dwindling demand for printing services. The industry is at the precipice of a significant change on account of competitive threats from digital media. The severity of the situation keeps the pressure on EPCO’s core business. Although EPCO has strived to diversify, the brief track record in the power segment keeps a lid on the rating. The rating is further weighed down by the execution risks in its current and forthcoming power projects. EPCO, through EP, invested heavily in cogeneration, which is more complicated and carries higher execution risks than solar power. The company is also exposed to country risk following the investment in Japan. The rating is tempered by a rise in EPCO’s debt level as it borrows more to fund growth opportunities. EPCO’s investment in cogeneration power projects and a solar power project in Japan raised the debt to capitalization ratio to around 70%, compared with 43.7% as of 2015. The company plans to invest in more solar farm projects in Japan, adding 23 MW of new capacity. The total cost of the new projects abroad is Bt2.7-Bt3 billion, with construction planned for 2017-2018. Should the deals be executed, EPCO would shoulder a higher debt load during the development phase.
TRIS Rating’s base-case forecast assumes EPCO’s revenues will be at least Bt850 million per annum during 2016-2019. TRIS Rating expects that EPCO will recognize income from Kyoto and co-operative solar farms, as well as the two cogeneration plants from 2017 onwards. The operating margin is expected to stay at around 45%. Operating income is expected to grow as a result of a larger revenue base and more stable income from the power segment. Funds from operations (FFO) is expected to total Bt500-Bt600 million per annum.
Going forward, the company is expected to keep the debt to equity ratio below 3 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, weakened recently but is expected to gradually improve once the most recent investments come to fruition. However, these two ratios should remain consistent with the current rating. During 2016-2019, the FFO to total debt ratio is expected to stay around 15%-18%, while the EBITDA interest coverage ratio will remain at 3-5 times. Total debt to capitalization is expected to stay in a range of 60%-70% over the next three years.
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