Tapping into medical contract manufacturing
? We initiate coverage of Vicplas with an Add rating and a P/E-derived TP of S$0.28.
? We see EPS CAGR of 10.8% over FY7/22-24F for Vicplas, driven by growth in its medical business.
? Re-rating catalysts are stronger-than-expected earnings due to new customer/product wins. Downside risks: disruptions from Covid-19.
10.8% EPS CAGR over FY22-24F driven by its medical business
We project 10.8% EPS CAGR over FY22-24F for Vicplas, driven by growth in its medical business. Vicplas noted that the Medtech contract manufacturing market’s revenue size is expected to grow by a CAGR of 11.4% over 2019 (US$52.9bn) to 2025F (US$100.8bn). The key drivers behind this growth are: a) an ageing population; b) increased demand for improved healthcare in developing markets; and c) increased willingness by product owners to outsource manufacturing to trusted partners that can fully support product and process innovation. To benefit from the industry growth, Vicplas aims to have a 7,000 sqm plant extension ready by end-2HFY22F in Changzhou (+100%; its current Changzhou plant occupies an approximate area of 7,024 sq m). According to its FY21 results presentation, the company is also considering the feasibility of acquiring or setting up a new plant near the US to provide additional manufacturing options to new and prospective customers.
Pipes and piping fittings business is recovering
We note that Vicplas’s pipes and pipe fittings business is also seeing a recovery. This is in line with the management’s guidance that the construction industry in Singapore is gradually recovering from the impact of Covid-19 though labour shortages and supply chain disruptions remain key risks. Other than the residential property market, Vicplas has also focused its efforts on government driven infrastructure spending. This segment’s profit (see Figure 18) grew to S$3.2m in FY21 from S$2.6m in FY20.
Initiate coverage with an Add; TP of S$0.28
We value Vicplas at 11x CY23F EPS, in line with the CY23F sector average P/E. We believe Vicplas will retain its earnings to grow the medical business and we expect dividend yields of 2.3-2.8% over FY22-24F. Re-rating catalysts are stronger-than-expected earnings due to new customer/product wins in FY22-23F. Downside risks include production disruptions from movement restrictions due to measures to contain the spread of Covid19, and production disruptions due to power shortage at its China plants.