Valuetronics Holdings (VALUE SP) - 3QFY17 Above Expectations On Strong Sustained Comparable Sales Growth
- Valuetronics posted strong 3QFY17 numbers with net profit up 70% yoy to HK$42.9m due to increased demand in the consumer electronics and industrial & commercial electronics segments.
- Consumer electronics revenue grew 92% yoy, driven by the addition of wireless lighting products with smart control features.
- Valuetronics is trading at 9.1x FY18F PE (ex-cash: 4.5x) with an attractive potential dividend yield of 5.6%.
- Maintain BUY with a higher PE-based target price of S$0.72.
- 3QFY17 sales grew 92% yoy largely due to new revenue streams in the consumer electronics (CE) segment and that 3QFY16 was a low base as Valuetronics exited the mass-market LED lightbulb segment.
- CE revenue rose 5.6% qoq from HK$261.1m in 2QFY17 to HK$279.9m in 3QFY17.
- Valuetronics has expanded its CE portfolio to include wireless lighting products with smart control features.
- Sales from the industrial and commercial electronics segment remained relatively stable, growing marginally from HK$312.6m in 2QFY17 to HK$316.7m in 3QFY17.
Gross margin fell qoq due to a change in sales mix.
- Group gross margin fell from 16.2% in 3QFY16 to 15.5% in 3QFY17, mainly due to the higher percentage of sales from the lower-margin CE segment.
Net cash formed a substantial portion of market capitalisation.
- As of 31 Dec 16, the group had net cash of HK$670.2m, about S$0.32/share or 50% of current market capitalisation.
- Including cash equivalents and financial assets, net cash and financial assets amounted to HK$741.7m, about S$0.36/share or 56% of current market capitalisation.
- Valuetronics has no debt. The company offers an attractive and very sustainable dividend yield of about 5.6% via a dividend payout policy of 30-50%.
Working capital turnover days ticked up.
- Valuetronics’ working capital turnover days in 3QFY17 were 51.3 vs 46.7 in 2QFY17. This was partly due to the qoq growth in sales and partly due to the early Chinese New Year in Jan 17.
- Production for the quarter peaked in Dec 16, resulting in an inventory build-up at the end of 3QFY17 in preparation for delivery in 4QFY17.
Protectionist measures from a new US administration.
- Valuetronics is well positioned to take advantage of potential opportunities as we estimate factory utilisation at around 80% currently. However, as with most manufacturers, Valuetronics is operating in an uncertain macroeconomic environment and an uncertain political climate with Donald Trump as the US president.
- If the US enters into trade wars with Asian economies, we expect tariffs to be more strategically targeted towards automobile manufacturers engaged in the final assembly rather than manufacturers engaged in more specialised components as in Valuetronics case.
- We raise our FY17-19 net profit estimates by 7-16% on the back of higher-than-expected sales from the new wireless lightning products and lower-than-expected administrative expenses.
- The company has a dividend payout policy of 30-50%.
- Given its huge net cash, we think Valuetronics is likely to maintain a dividend of HK$0.20/share for FY17, implying a yield of 5.6%.
- Maintain BUY but with a higher PE-based target price of S$0.72 (previously S$0.60), pegged to a 10% discount to peers’ average PE of 11.2x for FY18 to derive a target multiple of 10.1x.
- We elect to apply a 10% customer concentration discount as Valuetronics should derive most of its growth from its only automobile customer and its new customer in the wireless lighting space.
- On an ex-cash PE basis, the company is trading at a very conservative 4.5x FY18F PE with an attractive 5.6% dividend yield.
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- Additional customers in the IoT space.
- Additional customers in the automobile space.
- Higher-than-expected dividends.