Maybank Kim Eng Research 2015-07-10: Valuetronics - LED fading in significance; Upgrade to BUY

LED fading in significance; U/G to BUY 

  • Upgrade to BUY from SELL with new TP of SGD0.62 from SGD0.25. We now value Valuetronics at 9.1x FY17 PER 
  • Raise FY3/16-17 EPS by 5-11%. 
  • Lighting business becoming less material. Estimated 10% contribution to FY3/15 operating profit. Company confident of acquiring new Consumer Electronics & Industrial customers. 

LED’s importance has shrunk, so has its drag 

  • Valuetronics’ lighting revenue remains soft. We estimate that in FY3/15, LED revenue declined 21% YoY, contributing about 30% to the total and 49% to its Consumer Electronics revenue. 
  • Operating profit contribution is estimated at HKD17m or 10% of the total, due to a low margin of 2.3%. 
  • We forecast that LED revenue will decline 10-15% YoY pa in FY3/16-18. 
  • Given modest contributions, LED’s drag on earnings should also ease. 

New customers expected in both segments 

  • Management is confident of acquiring new customers in both its Consumer and Industrial segments. 
  • It has been very selective in choosing new customers, as it aims to be their sole strategic supplier. It expects to add at least one Industrial customer this year. 
  • We prudently forecast that Industrial revenue will grow 12% YoY in FY3/16-18, a slowdown from last year’s 23% as two customers have completed their migration of production to Valuetronics’ facilities. 

Upgrade to BUY with new TP of SGD0.62 

  • We raise our FY3/16-17 EPS by 5-11%. 
  • We benchmark Valuetronics’ forward PER to a group of small and mid-sized contract manufacturers, before adding back cash. 
  • We upgrade it to BUY with a new TP of SGD0.62 from SGD0.25. This is now based on 9.1x FY17 PER. Our previous TP was based on 4.4x FY16. Cash per share is SGD0.22. 
  • We expect yields to stay high at 7-8% in FY3/16-18.

(Truong Thanh Hang)