Brokers' take: CGS-CIMB initiates coverage on Vicplas International with 'add', sees growth in medical business

CGS-CIMB on Wednesday (Jan 26) initiated coverage on Vicplas International 569 : 569 0%with an "add" call and a target price of S$0.275.

The target price is 11 times the brokerage's estimates for the medical device maker's earnings for the calendar year of 2023 -- roughly in line with the sector's average.

In a research note, analysts William Tng and Izabella Tan said they expect Vicplas's earnings per share (EPS) to grow at a compounded annual rate of 10.8 per cent from FY2022 to FY2024 -- driven by growth in its medical contract manufacturing business.

Key growth drivers include an ageing population, increasing demand for improved healthcare in developing markets, as well as higher willingness by product owners to outsource manufacturing to partners that can support product and process innovation.

The medical devices business has been growing fast. Vicplas reported core EPS of S$0.02 for FY2021 ended July -- more than double its core EPS of S$0.009 for FY2020. CGS-CIMB is projecting core EPS to hit S$0.027 in FY2024.

Vicplas makes a wide range of medical devices including pharmaceutical bottles, surgical devices, orthodontics and nasal swabs. It also has a pipes and pipe fittings business.

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CGS-CIMB said the pipes segment should also do well as Singapore's construction industry recovers. The brokerage is projecting this segment will be able to grow revenue by 4.3 per cent year on year from FY2022 to FY2024 -- based on its house GDP growth forecast of 4.3 per cent for Singapore.

The analysts cautioned, however, that the segment's profit margins could be affected by higher operating costs and raw material prices in FY2022, with labour shortages and supply chain disruptions remaining key risks.

Profit from the pipes segment grew to S$3.2 million in FY2021, from S$2.6 million in FY2020.

CGS-CIMB is also forecasting a dividend yield of 2.3 to 2.8 per cent over FY2022 to FY2024.

"Re-rating catalysts are stronger-than-expected earnings due to new customer or product wins in FY2022 to FY2023," the analysts said.

"Downside risks include production disruptions from movement restrictions due to measures to contain the spread of Covid-19, and production disruptions due to power shortage at its China plants."

Shares of Vicplas ended at S$0.225 on Wednesday, up S$0.005 or 2.3 per cent.