RHB Securities 2015-08-18: Valuetronics - 1Q16; Undergoing Transition From CE To ICE. Maintain BUY.


Undergoing Transition From CE To ICE 

  • 1QFY16 NPAT shed only 1.1% YoY to HKD33.5m despite a more-than-expected 27% revenue drop in its CE segment. This was mainly due to increased weightage in the higher-margin ICE segment, which lifted the gross margin to 14.3% (from 12.8%). 
  • Being prudent, we lower our FY16F NPAT slightly by 7.3%, resulting in a lower DCF-backed TP of SGD0.60 (WACC: 12%, TG: 0%, 58% upside). 
  • Maintain BUY given a bright outlook for its ICE segment, coupled with a 9.9% dividend yield. 

 Transition from CE to ICE. 

  • Valuetronics is currently undergoing a transition phase where the higher-margin industrial and commercial electronics segment (ICE) will gradually represent more of its topline, given its strong growth and bright outlook. 
  • At the same time, the more-than-expected 27% YoY revenue decline in its consumer electronics (CE) business, especially for its light-emitting diode (LED) lighting products, caused 1QFY16 (Mar) revenue and NPAT to drop 12.2% and 1.1% YoY respectively to HKD550m and HKD33.5m. 

 Attractive FY16 dividend yield of 9.9%. 

  • Even after lowering our FY16 NPAT estimate by 7.3% and incorporating a 50% payout ratio, the same as in FY14 and FY15, Valuetronics would be potentially paying an attractive dividend yield of 9.9% for FY16. 
  • The company also has an excellent record of paying dividends in HKD and rewarding its shareholders, backed by its strong balance sheet with 75% of its market cap made up of net cash. 

 Key beneficiary of CNY devaluation. 

  • With all of Valuetronics’ factories based in Shenzhen, China and over 90% of its revenues in USD, it will be one of the key beneficiaries of CNY devaluation, in our opinion. This should have a positive impact on its earnings for the rest of FY16. 

 Maintain BUY with a lower DCF-backed TP of SGD0.60. 

  • We adjusted our earnings to incorporate the greater-than-expected revenue drop in its CE segment. This results in us cutting our FY16 NPAT estimate by 7.3%, leading to our lower DCF-backed TP of SGD0.60 (from SGD0.64). 
  • However, in view of the strong positive outlook for its ICE segment, coupled with an attractive forecast dividend yield of 9.9% to be paid out in HKD, we remain positive on Valuetronics. Maintain BUY.

Jarick Seet | http://www.rhbgroub.com/ RHB Securities 2015-08-18
BUY Maintain BUY 0.60 Same 0.64