Valuetronics - DBS Research 2017-05-23: In For The Long Haul

Valuetronics - DBS Vickers 2017-05-23: In For The Long Haul VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics - In For The Long Haul

  • Valuetronics will benefit as outsourcing for electronic manufacturing services continues to gain favour, supported by its proven track record and robust financials.
  • Earnings projected to grow at 11.1% CAGR over FY16- 19F led by new products.
  • Evolving needs and complexities surrounding IoT trends offer strong opportunities in the long-term.
  • With c.35% of market cap backed by net cash, we peg our fair value at S$0.95, based on 8x CY17F ex-cash PE 



THE BUSINESS 


In the business of creating value. 

  • Valuetronics is an integrated electronics manufacturing services (EMS) provider, whose extensive manufacturing capabilities span the entire EMS value chain - from procurement to engineering design and development, assembly and even supply chain support services, thus offering more value-add than traditional EMS players.

Attractive opportunities under Internet of Things (IoT). 

  • The push towards greater connectivity and smarter capabilities is set to drive the development and adoption of connectivity tools and applications, which has – and should continue – to open doors for integrated EMS players with a proven record such as Valuetronics.
  • Apart from new IoT-related product ramps, which are poised to drive earnings growth by 11.1% CAGR from HK$120m in FY16 to HK$165m in FY19F, business development efforts across the group’s sub-segments are currently underway. If successful, these could significantly enhance its long-term outlook.

The Stock Fair value of S$0.95, based on 8x CY17F ex-cash PE. 

  • Given its record of strong cashflows and firm earnings outlook, we believe that Valuetronics deserves to at least trade at 8x CY17F ex-cash PE (discount to peers’ 9x). Hence, we value the stock at S$0.95. A stable 20 HK cts dividend (4.3% yield) is also on offer.
  • Key risks include 
    1. sustained weakness in the global economy and 
    2. small customer base in Consumer Electronics (CE) segment, which could result in significant fluctuations in business performance.


REVENUE DRIVERS 


Strength lies in its integrated model. 

  • Incorporated in 1992, Valuetronics is an integrated electronics manufacturing services (EMS) provider, whose extensive manufacturing capabilities span the entire EMS value chain - from procurement to engineering design and development, assembly and even supply chain support services (such as inventory and shipment), thus offering more value-add than traditional EMS players.
  • Valuetronics’ proven engineering expertise and experiences have enabled the group to deliver a wide range of solutions, cutting across diverse sectors through the years. The group broadly classifies contributions from these sectors into: 
    1. Consumer Electronics (CE), which contributed 42.5% of 9M17 revenue, and 
    2. Industrial & Commercial Electronics (ICE), which made up 57.5% of 9M17 sales.

Moving towards higher-tech CE products. 

  • Post Valuetronics’ complete exit from the mass market LED lighting segment in 3Q16, the group’s CE operations were predominantly focused on the production of consumer lifestyle products – including shavers, electric toothbrushes and bug zappers, for a leading Dutch MNC.
  • Leveraging on the group’s expertise in LED products, we believe that the recent introduction of Valuetronics’ new smart lighting sub-segment (essentially wireless lighting products with smart control features), and commercial rollout of “smarter” sanitary systems should help sustain growth for the CE segment in the mid-to-high single digits.

ICE segment poised to deliver double-digit growth over next few years. 

  • The ICE segment generally commands higher margins and encompasses a host of complex and sophisticated products such as printers, temperature sensing products, communication products, electronic products for the automotive industry and medical equipment.
  • While the performance and outlook for individual products are expected to be fairly mixed, we believe Valuetronics’ venture into the automotive segment (for the production of in-car connectivity modules) and growing printer portfolio should help drive ICE sales growth around the low teens region over the next few years.


KEY OPERATING ASSETS 

  • Sitting on 110,000m² of manufacturing space. Headquartered in Hong Kong, the group is well supported by a design centre and manufacturing facilities, which are strategically located near Hong Kong and Shenzhen – in Daya Bay and Danshui Town (Guangdong Province, People’s Republic of China).


GROWTH PROSPECTS 


Group-wide opportunities under IoT trends. 

  • The continued push for greater connectivity and smart capabilities between users, devices and cities is set to drive the development and adoption of connectivity tools and applications, which could open doors for integrated EMS providers with proven track record such as Valuetronics.
  • Riding on these prospective opportunities under the Internet of Things (IoT) trend, we believe that near-term growth for Valuetronics will likely stem from the following product segments – whose lifecycle and current contributions to group profit are still in their infancy: 
    1. Data and media connectivity module produced for a Tier 1 automotive system manufacturer, and 
    2. Wireless lighting with smart control features for a Dutch MNC Proactive engagement with customers. 
  • Valuetronics takes effort to initiate new product refinements and market opportunities through early engagement with clients right from the design and development stage. Management believes this approach has been the cornerstone of the group’s success in recent years. 
  • Business development efforts across the various sub-segments are currently underway and if successful, could significantly enhance its long-term outlook.

Open to inorganic growth. 

  • Sitting on substantial net cash of HK$670.2m (c.31.8 Scts per share currently, or 28.9 Scts per share post bonus issue) as at end-3Q17, Valuetronics is well-equipped to finance attractive inorganic growth opportunities internally as they arise. 
  • Opportunities that may be of interest include vertical integration or expansion of customer base through acquisitions.


MANAGEMENT & STRATEGY 


Experienced management team plays pivotal role.

  • Managing Director, Mr Tse Chong Hing, and founder, Mr Chow Kok Kit, each carry over twenty-five years of experience in the electronics manufacturing industry, and have been instrumental in navigating the company through cycles. 
  • Following management’s strategic decision to phase out the mass market LED light bulbs business – which suffered from years of aggressive price competition and margin erosion to focus on higher-margin value-added segments, we see earnings growing at 11.1% CAGR from HK$120.4m in FY16 to HK$165.3m in FY19F.

Management’s interest aligned with shareholders. 

  • While Valuetronics has remained committed to a formal dividend policy of a 30-50% payout ratio since its listing in 2007, we note that it has paid a consistently paid a 20 HKcts dividend over FY14-16 – even as FY16 earnings dipped c.20% y-o-y, resulting in a higher 63% dividend payout in FY16.
  • Collectively holding a 25.68% stake in the company, the pick-up in earnings and fairly low capex needs should further incentivise management to at least maintain a 20 HKcts dividend ahead, representing prospective yield of 4.3%.



NOT RATED
Return *: 2
Risk: Moderate
Potential Target 12-mth* : 12-Month S$ 0.95 (14% upside)


*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.


Singapore Research Team DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-05-23
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.95 Same 0.95



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