Valuetronics Holdings Ltd - CIMB Research 2017-05-29: 4Q17 New Orders In Ramp-up Phase

VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 4Q17 New Orders In Ramp-up Phase

FY3/17 core net profit of HK$151m was ahead of our/consensus full-year numbers.
We expect both CE and ICE segments to continue their double-digit sales growth in FY18F, thanks to roll-out of newly-launched products.
Lower operating cash flow in FY17, but cash conversion cycle is steady at 42 days.

Maintain Add with a higher TP of S$0.89 (11x CY18 P/E, a narrower discount of 10% to peers’ average). Valuetronics currently trades at 11.2x FY18 P/E (6.3x ex-cash).

Valuetronics reported FY3/17 topline of HK$2,275m (+16.5% yoy) and core net profit of HK$151m (+25.1% yoy), above our forecasted HK$2,123m and HK$137m respectively.
The results beat mainly came from a stronger-than-expected 4Q17, as sales climbed 44.0% yoy and 8.3% qoq, due to the building of inventory ahead in 3Q17 and delivered in 4Q17.
Gross margin dipped to 14.2% (3Q17:15.5%) during the seasonally-weaker quarter, leading to a 5.3% qoq fall in 4Q17 core net profit (HK$40.9m, +36.4% yoy).

Both industrial & commercial electronics (ICE) and consumer electronics (CE) segments registered strong growth in FY17 at 14.1% and 19.7% yoy respectively, driven by the automotive (AU) connectivity modules and wireless lighting with IoT features.
We expect such sales momentum to be sustained into FY18F as these new products enter mass production and initial phase of product lifecycle respectively, underpinning our FY18-20F sales forecasts of 10-12% p.a.
We also estimate gross margins to trend downwards.

Valuetronics also announced a recent award win for supplier excellence with its major AU customer (tier-1 automotive parts manufacturing company), reflecting its integral role as part of the supply chain for two years.
While the audit completion by a new OEM for its AU connectivity modules has been postponed to end-FY18, we think this could give the firm another leg-up when the new orders kick in.

Valuetronics recorded FY17 operating cash flow of HK$161m, lower than FY16’s HK$289m as a result of more cash tied up in working capital. Its cash conversion cycle was stable at 42 days in FY17, vs. 45 days in FY16.
The company remains in a net cash position (with zero borrowings), that makes up c.39% of its market cap (excluding AFS assets).

The company declared final DPS of 15 HKcts and special DPS of 5 HKcts, implying 4.4% FY17 dividend yield.
We suspect near-term upside to dividend payout may be capped (30-50% dividend policy) as higher business activities may require more working capital, and key customers request for more favourable credit terms.
There is also a possibility of non-renewal of the Danshui factory lease (expires by end-2020), which may result in setting aside more capex should management decide to look for an alternative site.

We raise our FY18-19F EPS estimates by 5.7-12.9%, to factor in higher sales growth, gradually declining gross margins and lower operating costs.
We also introduce FY20 forecasts, and our TP thus increases to S$0.89 (adjusted for 1:10 bonus issuance). This is pegged to 11.0x CY18 P/E (prev. 9.8x), now at a smaller 10% discount to industry average of 12.2x.
The stock offers 4.3-4.8% FY18-20F dividend yield.
Risks to our Add call include unexpected order pushback.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-29

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.89 Up 0.720