VALUETRONICS HOLDINGS LIMITED
BN2.SI
Valuetronics Holdings (VALUE SP) - 2QFY17 In Line; Returns To Revenue Growth
- After six consecutive quarters of comparable-sales contraction, Valuetronics’ 2QFY17 net profit rose 18.2% yoy to HK$38.1m, driven by higher sales in the consumer electronics segment.
- Valuetronics is trading at 8.6x FY18F PE (ex-cash: 3.5x) with an attractive potential dividend yield of 6.7%.
- Maintain BUY and PE-based target price of S$0.60.
RESULTS
- 2QFY17 sales grew 9% yoy, largely due to new revenue streams in the consumer electronics (CE) segment.
- CE revenue increased 58% qoq to HK$261.1m (1QFY17: HK$165m). Valuetronics has expanded its product portfolio in the CE segment to include wireless lighting products with smart control features.
- Sales from the industrial and commercial electronics (ICE) segment remained stable at HK$312.6m in 2QFY17 (1QFY17: HK$312.5m).
Gross margin down qoq due to a change in sales mix.
- Group gross margin fell from 16.0% in 1QFY17 to 14.6% in 2QFY17, mainly due to the higher sales from the lowermargin CE segment. We estimate gross margin remained relatively stable for the ICE segment.
Fortress-like balance sheet.
- As of 30 Sep 16, the group’s net cash stood at HK$659.2m, (S$0.31/share), or 57% or market capitalisation. Including cash equivalents and financial assets, this would have amounted to HK$733.6m (S$0.35/share), or 64% of market capitalisation.
- Valuetronics has zero debt. The company offers an attractive and very sustainable dividend yield of about 6.7% with a dividend policy of a 30-50% payout ratio.
STOCK IMPACT
Riding on the global trend of Internet-of-Things (IoT).
- The new wireless lighting product in the CE segment and the in-car connectivity modules in the ICE segment are some of the products that are directly related to the rise of connectivity and IoT.
- With the latest wireless lighting products, Valuetronics is positioning itself well as it develops, improves and gains credibility as a manufacturer for the technology of tomorrow.
Negative operating cash flow is a good thing.
- Valuetronics generated negative cash flow of HK$11m from operations in 2Q17. This was due to an increase in working capital as the company generated an additional 9% of sales mainly from the new wireless light bulb segment for the quarter.
- We expect this to be temporary and to revert back to positive operating cash flow in the next quarter.
Operating environment is challenging, macro environment is not encouraging.
- With sluggish real global growth rates, weak earnings and sales growth in the corporate sector contributing to a more cautious risk appetite, risks remain that some of Valuetronics customers may be haggling for better credit terms or lower production cost.
EARNINGS REVISION/RISK
- We keep our FY17-19 core net profit estimates unchanged. The company has a dividend policy of 30-50% payout ratio.
- Given its large net cash, we think Valuetronics is likely to maintain a dividend of HK$0.20/share for FY17, implying a yield of 6.7%.
VALUATION/RECOMMENDATION
- Maintain BUY and PE-based target price of S$0.60, pegged to peers’ average of 9.5x FY18F PE.
- On an ex-cash PE basis, the company is trading at a very conservative FY18F PE of 3.5x with an attractive 6.7% dividend yield.
SHARE PRICE CATALYST
- Additional customers in the IoT space.
- Special dividends.
Nicholas Leow
UOB Kay Hian
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http://research.uobkayhian.com/
2016-11-08
UOB Kay Hian
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