SVI

SVI Plc

 

We returned from a visit to SVI’s factory with a positive view of its current operations and strategy. The company demonstrated the readiness of its plant and production line following rehabilitation work from fire damage. The addition of quality-control machinery in 2Q16 will unlock company growth in 2H16. Also, the acquisition of SEIDEL represents a good move to penetrate the European market and top up earnings. We upgrade 2016-17 core earnings by 17-26% and raise our target price to Bt6.80 (from Bt5.80). Reiterate Outperform rating. 

 

Investment highlights 

 

- Plant nearly fully restored but growth won’t take off until 2H16. SVI’s operations are almost completely back to normal following a fire at its plant in late 2014. Factory capacity has been rebuilt but utilization has been capped at 70-80%, or approx USD60mn per quarter, due to a bottleneck in the inspection process. The installation of additional QC machinery in late 2Q16 will unlock capacity utilization, boosting both sales and profitability in 2H16. The company estimates that resolving the QC constraints will boost production capacity to USD80mn per quarter. 

 

- SEIDEL acquisition a key step in making SVI a global player. The highlight of the meeting was new information provided about SVI’s recent purchase of SEIDEL, which gives the company a base in Central Europe. The acquisition includes 3 factories in Austria, Hungary, Slovakia and 2 R&D companies in Austria and Slovenia. SEIDEL’s annual turnover is approx. USD100mn, while its profitability is about half of SVI’s. We thus expect the consolidation of SEIDEL will top up SVI’s 2016 revenue by 28% and increase core earnings by 16%. With SEIDEL, SVI will be able to offer “just-in-time” services and high-value box-built products.  

 

- 2 design houses to enhance SVI capabilities. As part of the SEIDEL deal, SVI obtained 2 product design companies: SEMENTIS Eng GmbH (Austria) and EMSISO (Slovenia). These units will allow SVI to jumpstart its Design & Manufacturing Services strategy (DMS model), broadening its scope from just Electronics Manufacturing Services (EMS) at the moment. Also, it will strengthen SVI by allowing it to offer Medium-Volume/High-Value-Add (MV/HVA) and higher-margin services, which should boost its competitive advantage in the medium-long term. 

 

► Cambodian factory to be added on in 4Q16. SVI is planning to build a new factory in Phnom Penh, Cambodia. In our view, this will enable it to benefit from trade incentives (GSP), while also mitigating the risk of customers relocating to find more affordable and younger labor forces. We believe the expansion will help spur growth and keep SVI competitive in lower-than-current-margin product categories. The new factory in the Cambodian capital is expected to start contributing revenue in 4Q16 and reach its maximum run rate in 2017 (USD40mn per year). 

 

- Upgrade 2016-17 core earnings by 17-26%. We have revised up SVI’s 2016-

 

17 earnings by 17-26% given that we factor in the SEIDEL acquisition and the expansion in Cambodia. 

 

Valuation 

 

- Upgrade target price to Bt6.80. We reiterate our Outperform rating on SVI. We believe the share price deserves to trade at a slight premium to its historical average given the impressive growth outlook. We upgrade our fair price to Bt6.80 (from Bt5.80), derived from a PER methodology based on 15x PER (+2S.D. = 14x PER) and 2016 EPS.