VAT’s net sales improved significantly by 23
VAT’s net sales improved significantly by 23.6%, which has been mainly driven by the strong performance of the Valves segment and the increase in market share by 2%. In particular, Display ; Solar business more than doubled its revenues, while demand in the Semiconductor business unit accelerated during the second half of the year. Based on our analysis, we estimate an organic growth of 30% for 2017 and a CAGR of 9% between the years 2016-2021. Operating margin exhibits an increasing pattern over the fiscal period 2014-2016 and is expected to further raise from 23% to 24% in 2017, far above the industry average at 8.5%. This trend reveals a strong operating efficiency of VAT. Considering the predominant presence of variable costs in the operating expenses architecture of VAT, the fact that VAT outsourced 60% of the value chain and the volatility of the target industries, it is pivotal for the company to account on a comfortable buffer for hard financial times. A similar portrait is offered by the Net Margin and Adjusted EBITDA Margin, displaying a 13.2% for the former and a 31.1% margin for the latter as of 2016, which falls slightly short of the midterm target EBITDA margin at 33%. However, the strong in sales requires investments in capacity, people and footprint. Thus, the rate of EBITDA margin is expected to slow down.
Strong and resilient cash flow generation through economic cycles
VAT has proven to be successful in delivering high EBITDA and FCF margins (Figure 1), by showing resilience in downturns due to lean and flexible cost structures. Even, during the crisis in 2009 VAT managed to deliver a 23% Adjusted EBITDA margin. Despite the investments to meet high demand, VAT shows an aggressively increased FCF conversion ratio from 50.6% in 2013 to 85.6% in 2016, reflecting solid growth and operational efficiency. High FCF in 2016 were offset by Capex need, which increased by almost 50% year over year. Excluding 2013 due to the Malaysia plant establishment, capex needs were relatively low around 4% of net sales, while management’s guidance for the following years set a target around 5-6% of net sales.