SVI

SVI Plc

Investment thesis: SVI’s story keeps getting better—sequential QoQ post-flooding operational improve-ments. The core operation bounced into black ink in 1Q12 and we expect core earnings growth of 71% QoQ for 2Q12, 140% HoH for 2H12 and 34% YoY for FY13, driven by sales volume expansion, a fatter GM and lower SG&A. Our HOLD rating stands with a YE12 target price of Bt 3.50—pegged to an EV/EBITDA ratio of 8.18x (1.8SD above its FY5-11 mean).
QoQ core profits jump … We anticipate that SVI will post 2Q12 core earnings of Bt111m, up 71% QoQ. The top-line should rise 31% QoQ, backed by the Bangkadi plant’s operational recovery to a run rate of 65-70% in 2Q12 from 50% in 1Q12. Despite the wage cost hike, GM should have expanded in tandem with greater sales volume and belated govt financial assistance payout for wages paid during the 4Q11 flooding period.
We expect that the SG&A/sales ratio softened QoQ (but remained above the normal range of 3-4%, as renovation expenses would have been booked during 2Q12). SVI guides for an FX loss for the quarter, but insurance payouts should outweigh the effect of the FX loss. As such, we anticipate a net profit of Bt130m.
…and momentum will be sustained through 2H12: 2H12 core earnings will expand further as the  utilization rate increases to 70-75% in 3Q12 and 80-90% in 4Q12. GM will also rise more with greater sales volume. The SG&A/sales ratio looks set to diminish QoQ, but will remain above the normal range this year—we expect further renovation expenses in the region of Bt20m to be booked in 2H12. Insurance payouts are likely to remain slow (only Bt214m in 2H12); it’s likely that a big chunk of SVI’s insurance claims won’t be paid till FY13. Stripping out extra items, we anticipate that core earnings will peak in 4Q12.
FY13 core profit will set a new high: We expect the FY13 top-line to recover fully with the recruitment of four new customers that will cover entirely the revenue lost from a client that shifted its orders to another vendor in 2012. SVI targets sales of about US$350m (our assumption is $320m). GM looks set to improve as the new customers’ orders will yield fatter GMs than those of existing clients. We anticipate 34% core profit growth for FY13, led by operational improvements and due to the low base set by FY12.