Valuetronics Holdings Ltd - CIMB Research 2017-02-13: 3QFY17 En route to re-rating

VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 3QFY17 En route to re-rating

3Q/9MFY17 core net profit formed 31%/81% of our FY3/17 forecasts, which we deem in line as we expect 4Q to be seasonally weaker.
The revenue of both CE and ICE segments increased by 92%/8% yoy in 3QFY17, with more products in the pipeline.
In our view, Valuetronics is still cheap at 8.7x FY17 P/E (3.5x ex-cash), given its sustainable earnings growth and attractive FY17-19F dividend yields of 6.4%.

Maintain Add, with higher TP of S$0.72, now pegged to 9.8x CY18 P/E (still at a 20% discount to the industry average), instead of 8.4x previously.

VALUE posted a strong set of 3QFY17 results, reporting both sales and earnings growth and stable gross margin of 15.3% in 9MFY17 (vs. 15.0% in 9MFY16).
3QFY17 sales rose 2.4% qoq and 35.2% yoy, led by growth in both consumer electronics (+92% yoy) and industrial & commercial electronics (+8% yoy). Hence, 3Q/9MFY17 core net profit increased 70%/22% yoy respectively, forming 31%/81% of our full-year forecasts, which we deem in line due to the seasonally-weaker 4Q.

We saw exceptional revenue growth in the consumer electronics (CE) segment (+92% yoy) in 3QFY17, partly due to VALUE’s complete exit from the less profitable, massmarket LED lighting in 3QFY16.
The addition of wireless lighting, with smart control features in 2QFY17 contributed to the 3.8% qoq revenue growth in this segment.

In our view, sales of communication products in the ICE portfolio will struggle but this will be offset by stronger sales growth for printers and automotive modules.
VALUE’s strong track record of offering high product quality and consistency resulted in it receiving a product transfer from its competitor and potentially gaining a new end-customer for connectivity modules. We expect both products to commence sales contribution in FY18F onwards.

Operating cash flow fell to HK$57m at end-9MFY17 from HK$285m at end-9MFY16, led by a significant increase in net working capital that was in tandem with revenue growth.
The rising CE sales contribution from its key Dutch customer also meant extended payment terms.
With zero debt and cash/share of S$0.35 (including AFS assets) at endDec 2016, VALUE currently trades at 8.7x FY17 P/E (ex-cash P/E of 3.5x).

No change to our FY17F EPS as we anticipate a seasonally-weak 4QFY17.
We raise FY18-19F EPS marginally by 3-4% on the back of:
1. higher CE sales growth, and
2. better gross margins for ICE segment.
We raise our target price to S$0.72 as we adopt a higher target CY18 P/E multiple of 9.8x (previously 8.4x), still pegged to a 20% discount to its regional peers’ average of 12.2x.
We believe VALUE will re-rate, supported by sustainable earnings growth and attractive dividend yields.

The stock offers FY17-19F dividend yields of 6.4%, based on our base-case scenario of 20HKcts DPS.
Potential catalysts are higher-than-expected dividend payout and stronger earnings growth.
Key risks to our Add call include unexpected order pushback and unfavourable US trade protectionist measures.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-02-13

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.72 Up 0.600