SVI

SVI Plc
Investment thesis
Although SVI’s sales won’t have improved significantly in 3Q13, we expect core earnings for the quarter to post both an increase, both QoQ and YoY, on GM expansion. Sales and core profit should move up further QoQ (no seasonal impact) in 4Q13 on orders from new customers, then normalize to a pre-flooding level in 1Q14. Moreover, expected hefty insurance payouts in 4Q13 and 1Q14 would boost trading sentiment toward the stock. Valuation-wise, SVI trades at an FY14 core PER of 11x, slightly higher than its long-term average of 10x. We believe the stock deserves a premium, premised on expectations of record sales and further GM expansion in FY14. Our BUY rating stands.
3Q13 core earnings to post both QoQ and YoY growth
We estimate a 3Q13 net profit of Bt195m up 3% QoQ but down 66% YoY from the high base set by 3Q12 (when a Bt423m insurance payout was booked). The top-line should post a 16% QoQ rise on seasonality but be flat YoY, as orders from new customers remained subdued during the quarter. Our model indicates that GM expanded by 40 bps QoQ and 280 bps YoY on baht depreciation and efficiency improvements. The SG&A-to-sales ratio is likely to have declined 50 bps QoQ to 4.3%. Core earnings should post a jump of 22% QoQ and 71% YoY to Bt145m—the best quarter since the 4Q11 flooding. There would have been an FX loss of about Bt10m and an insurance payout (we assume Bt60m) in 3Q13.
New customers to ramp up orders in 4Q13
In 4Q13, expected new customer order expansion will push up sales QoQ, even though the fourth-quarter is normally low season. We model for FY13 sales of US$265m (the firm bullishly guides for $300m). Based on our assumptions, SVI will achieve FY13 core earnings growth of 16.2%. For FY14, the firm guides that six new customers will make for $83m in new sales next year. We currently assume that the firm will achieve only 40% of its sales target, which would make for FY14 sales growth of 26% YoY.
GM will be a highlight of next year. New clients should yield GM in the region of 17-18%—substantially more than the GM of orders manufactured for existing customers of about 12%. As such, we expect GM to fatten by about 250 bps to 11.4% in FY14.
More progress on insurance payout
Since 4Q11, SVI has received insurance payouts totaling Bt852m from aggregate claims of around Bt2.25bn. Management expects the remaining claims to be paid by June 2014. The firm guides that it will book Bt400-500m in 4Q13 and Bt500-700m in 1Q14. FY14 CAPEX is projected in the range of Bt300-350m. We expect a big chunk of the upcoming insurance payouts to be allocated to CAPEX; the remainder is likely to be used to pay down debt, transforming the balance sheet into a net-cash position.