Valuetronics Holdings (VALUE SP) - UOB Kay Hian 2018-02-13: 3QFY18 Growth Across All Segments But Minor Supply Chain Issues Persist

Valuetronics Holdings (VALUE SP) - UOB Kay Hian 2018-02-13: 3QFY18 Growth Across All Segments But Minor Supply Chain Issues Persist VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings (VALUE SP) - 3QFY18 Growth Across All Segments But Minor Supply Chain Issues Persist

  • Valuetronics posted strong 3QFY18 results with net profit up 35.7% y-o-y to HK$58.2m due to growth across the consumer electronics and industrial commercial electronics segments. 
  • Gross margins were impacted slightly due to a change in sales mix. The company continues to see minor supply chain challenges but this should not impact the group significantly. 
  • Maintain HOLD with a lower PE-based target price of S$0.95 as we lower our forex assumption. Entry price: S$0.86.



RESULTS


3QFY18 sales grew 34.2% y-o-y as Valuetronics Holdings (Valuetronics) saw growth in both the consumer electronics (CE) and industrial commercial electronics (ICE) segments.

  • The CE segment saw revenue grow 48.1% y-o-y in 3QFY18 to HK$401.1m vs HK$270.9m in 3QFY17. 
  • The ICE segment grew 22.3% in 3QFY18 to HK$387.2m vs HK$316.7m in 3QFY17. 
  • The increase in CE sales was due to increased demand for smart LED lighting products with internet of things (IoT) features. Its smart LED lighting customer continues to add new features and enhancements to the app and the ecosystem so as to increase user adoption rates. 
  • ICE sales grew by 10.5% y-o-y in 2QFY18 due to strong performance in connectivity modules used in the automobile industry. 
  • Surprisingly, Valuetronics saw double-digit growth in the printer segment as they added a new customer that provides barcode and transaction printing solutions across a broad range of industries.

Gross margin and working capital. 

  • Gross margin fell marginally by 1.1% from 15.5% in 3QFY17 to 14.4% in 3QFY18. The group saw a change in sales mix with the lower-margin CE segment forming 51% of sales in 3QFY18 vs 46% of sales in 3QFY17. This resulted in a lower gross margin for 3QFY18. 
  • Receivables turnover days rose slightly from 82 days in 3QFY17 to 86 days in 3QFY18 as CE customers are generally given less generous credit terms. 
  • Inventory turnover days rose slightly to 65 days in 3QFY18 from 62 days in 3QFY17, which was in line with the increase in revenue.

Healthy financial position. 

  • Valuetronics maintains a healthy financial position with a net cash position of HK$640m with zero borrowings as of 3QFY18. Net cash forms approximately 25% of market capitalisation.


STOCK IMPACT


Supply chain challenges persist. 

  • Valuetronics has guided that barring unforeseen circumstances, it expects to achieve profit growth for FY18. However, supply chain challenges continue to persist as the price of raw materials fluctuate, leading to extended procurement lead times. 
  • Valuetronics’ factories will shut down for two weeks during the Chinese New Year festivities.

Healthy utilisation. 

  • Valuetronics is not facing any utilisation issues as current utilisation stands at a healthy 80-85%. Some operations are not yet running on a 24-hour schedule, which leaves room for further upside to utilisation rates should customers come in with increased orders or the company wins new customers. 

Dan Shui manufacturing plant. 

  • Management is still in discussions with local authorities regarding the possibility of extending the Dan Shui plant lease which expires in 2021. 
  • We believe that should the lease of the plant not be extended, Valuetronics could either build another manufacturing facility in another location or even possibly expand the Daya Bay plant which we expect to cost HK$100m-150m.


EARNINGS REVISION/RISK

  • We raise our earnings estimates by 3.2-6.7%, as we increase our CE segment growth rate. 
  • We also lower our SGD/HKD exchange rate to 5.88.


VALUATION/RECOMMENDATION

  • Maintain our HOLD recommendation but with a lower PE-based target price of S$0.95 (previously S$0.99) as we peg to peers’ average PE of 11.3x for FY19.


SHARE PRICE CATALYST

  • Additional customers in the IoT space.
  • Additional customers in the automobile space.
  • Higher-than-expected dividends.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-13
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.95 Down 0.99



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