SVI

SVI Plc

Core profit beat our estimate
SVI reported a 3Q13 net profit of Bt206m, up 9% QoQ but down 64% YoY. Stripping out an FX loss and an insurance payout, core earnings would be Bt153m, a jump of 29% QoQ and 80% YoY. The core number was 6% above our estimate, due to fatter GM than expected, but was 10% short of the Bloomberg consensus. 
Results highlights
3Q13 sales rose 13% QoQ on seasonality but were flat YoY, as orders from new customers remained subdued. Gross margin expanded by 60 bps QoQ and 300 bps YoY on baht depreciation and efficiency improvements. The SG&A-to-sales ratio declined 50 bps QoQ to 4.3%. Core earnings jumped by 29% QoQ and 80% YoY to B153m, the best quarter since 3Q11. SVI booked an FX loss of Bt6m and an insurance payout of Bt59m in 3Q13. As such, net profit came to Bt206m, up 9% QoQ but down 64% YoY from the high base set by 3Q12, when the firm received a Bt423m insurance payout.
Outlook
SVI announced the winding up of four subsidiaries—Globe Vision, SVI Electronics (Tianjin), Nortech (Taiwan) and Shi Wei Electronics (Hong Kong). The closures will lead to further profitability improvements, led by lower SG&A costs. Shi Wei and Nortech are raw material sourcing firms that do not generate sales and SVI Electronics (Tianjin) contributes only 2-4% of total sales. We don’t expect the top-line to be affected by the closing of the Tianjin operation, as its customers agreed to purchase from SVI Thailand.
Although the fourth-quarter is normally low season, we expect 4Q13 core earnings to increase QoQ on rising sales tied to orders placed by new clients. GM should rise further in tandem with economies-of-scale and greater efficiency (brought by closing low-profit subsidiaries). In FY14, we anticipate core earnings growth of 67% on the twin effects of the low base set by FY13 and GM expansion, as orders from new customers generate significantly fatter GMs than orders from existing clients.
What’s changed?
We have revised up our FY13 and FY14 core earnings forecasts by 2% and 1%, respectively, to factor in greater expectations for GM. Our YE14 target price remains unchanged at Bt4.
Recommendation
SVI’s robust QoQ core earnings growth profile and scope for bottom-line upside from new customers in US (it plans to open a marketing office in the US) makes it worthy of a valuation premium over its peers, we believe. Our BUY rating stands with a YE14 target price of Bt4.0, pegged to a PER of 12x (up 0.7SD from its long-term average of 10x).