Fitch Affirms and Withdraws SVIs Ratings

Stocks and Financial Services Press Releases Friday May 19, 2017 16:53
Bangkok--19 May--Fitch Ratings

Fitch Ratings (Thailand) Limited has affirmed SVI Public Company Limited's (SVI) National Long-Term Rating at 'BBB+(tha)' with Stable Outlook and its National Short-Term Rating at 'F2(tha)'. The agency has simultaneously withdrawn the ratings on SVI for commercial reasons.

KEY RATING DRIVERS

Continued Business Recovery: SVI's operations have rebounded strongly after a fire at its plant in late 2014. The company restored production to pre-fire levels in 2016. Excluding the recently acquired European operations, SVI's revenue in 2016 increased to its pre-fire level of THB8.6 billion. We believe the company will be able to maintain its business and financial profile commensurate with the current rating over the medium term.

Acquisition Aids Diversification: Fitch expects the 2016 acquisition of Seidel Electronics Group Company (Seidel), an electronics manufacturing service (EMS) provider with plants in Austria, Slovakia and Hungary, to help the company to expand into new high-margin segments, such as automotive, transportation and medical, where Seidel is focused. This acquisition will also reduce the reliance on Scandinavian customers by adding new European customers. In 2016, the proportion of Scandinavian customers reduced to 52% of revenue from 71% in 2015.

Margin to Improve: Fitch expects SVI's operating EBITDAR margin to rebound to around 7% in 2017 and 2018 from 6.4% in 2016. We expect the restructuring of Seidel's manufacturing process and the streamlining of materials acquisition to help improve its cost structure and profit margin in the medium term. In 2016, the consolidation of Seidel lowered SVI's operating EBITDAR margin as Seidel's profit margin is lower than that of SVI due to higher overhead costs.

Healthy Financial Profile: Fitch expects SVI to maintain its FFO-adjusted net leverage below 1.0x over the next two years. FFO of THB700 million-900 million a year should be enough to support planned annual capex of THB400 million-600 million and dividends in 2017 and 2018. SVI had net cash of THB3.2 billion at the end of 2016.

EMS Growth Opportunity: SVI continues to benefit from stability in the EMS market, which is driven by industrial demand. In addition, manufacturers increasingly rely on EMS providers in their overall supply chain, in particular outside the consumer electronics sector. The company's strategy to focus on the growing non-traditional end-market segment, which is less volatile and offers higher margins, has helped sustain SVI's operations and business profile amid a challenging operating environment over the past several years.

Small Size, Concentration Risk: SVI's ratings are constrained by its narrow geographic coverage, its concentrated customer base, the likelihood of greater competition in the non-traditional EMS market, and technology risks associated with the electronics segment. Other constraints include its volatile working-capital requirement and exposure to foreign-exchange risk. However, this is partly offset by the purchase of forward contracts.

DERIVATION SUMMARY

SVI's business profile is supported by its focus on the growing and less volatile non-traditional end-product segment, which offers wider margin than the traditional EMS segment. Nevertheless, the sector's risk profile is above average. SVI operates in the EMS industry with a risk profile similar to that of KCE Electronics Public Company Limited (KCE, A-(tha)/Stable). Both focus on niche segments of their respective industries. They benefit from the lower competition and demand volatility, which help stabilise their revenue and earnings. However, SVI has a narrower profit margin than KCE and is smaller by both revenue and operating EBITDAR. These aspects warrant a rating one notch lower than that of KCE.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Revenue growth of 10%-15% in 2017 and 2018
  • EBITDAR margin improves to around 7% in 2017 and 2018 (2016: 6.4%)
  • Capex of THB600 million in 2017 and THB400 million in 2018
  • 40% dividend payout ratio
RATING SENSITIVITIES
Rating sensitivities are no longer relevant given today's rating withdrawals.
LIQUIDITY

Strong Liquidity: Fitch expects SVI's cash flow from operations to be enough to support capex and dividends in the medium term. SVI has consistently maintained a high cash balance (end-2016: THB3.9 billion), which has provided the company a large buffer against downside risks from the industry downturn and manufacturing disruptions over the past several years. The company has minimal debt maturing over the next 12 months of THB103 million at end-2016.

FULL LIST OF RATING ACTIONS
SVI Public Company Limited
Fitch has affirmed and withdrawn the following ratings:
--National Long-Term Rating at 'BBB+(tha)'; Outlook Stable
--National Short-Term Rating at 'F2(tha)'

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