Valuetronics Holdings - UOB Kay Hian 2015-09-22: Conviction BUY For This Value Gem

VALUETRONICS HOLDINGS LIMITED BN2.SI 

VALUETRONICS HOLDINGS (VALUE SP) - Conviction BUY For This Value Gem 

  • We initiate coverage on Valuetronics with a BUY recommendation and target price of S$0.56 based on 8.3x FY17F PE. 
  • Despite our conservative earnings forecasts (10% below consensus), Valuetronics is trading at a compelling ex-cash FY16F PE of 2.2x with a dividend yield of 9.1%. We believe the share price floor should be at S$0.300/share (Valuetronics’s net cash and holdings in short term investable grade bonds), which may continue to rise with the Group’s strong cash flow generation. 

INVESTMENT HIGHLIGHTS 


 Rising share price floor. 

  • We believe the share price floor for Valuetronics should be its hefty net cash pile and Available For Sale (AFS) assets (mostly short-term investable-grade US$ fixed-income bonds), which is S$0.300/share as at 30 Jun 15. Assuming Valuetronics maintains its free cash flow generation of S$0.07/share (as per FY15), share price may be nearly 100% backed by net cash and AFS assets by FY17. (assuming Valuetronics does not pay out any dividends during this period). 

 Fertile producing cash cow. 

  • Valuetronics generated positive free cash flow of S$7m-50m (S$0.02-0.136/share) from FY12-15. As a result of its strong cash flow generation, Valuetronics managed to double its cash pile from FY12-15 despite paying out nearly S$0.12/share in total dividends during this period. 

 Diversification bears fruit. 

  • Previous concerns of customer concentration risk have been allayed as Valuetronics has executed its diversification well over the years. Profit contribution from the consumer electronics (CE) segment (where one major customer forms 90% of CE revenue) has dropped from 70% in FY12 to 45% in FY15, with the shortfall replaced by the higher-margin ICE segment 

 Profit growth from FY17. 

  • While we expect FY16 to be affected by the LED segment, investors may see a profit recovery in FY17 driven by the continued demand from the higher-margin ICE segment and declining significance of the lower-margin LED business (we estimate profit contribution from the LED segment to be only 17% or less in 1QFY16). Despite our conservative earnings forecast (10% below consensus), net profit is expected to grow at 5-7% yoy in FY17-18. 

 9.1% dividend yield. 

  • Valuetronics has a dividend policy of paying out at least 30% of its earnings. We expect Valuetronics to maintain its dividend of HK$0.20/share, which translates to a yield of 9.1%. We commend the management on their consistent dividend payout and see this as a concrete alternative return of value to shareholders even if there is no capital appreciation in the stock. 

 A potential M&A target? 

  • In the light of the recent takeover offer made for Chosen Holdings, investors may be taking a re-look at some manufacturing companies with solid balance sheets and cashflow generation, like Valuetronics. 
  • We note that the management of Valuetronics currently owns a 26.1% stake in the company. Assuming a management buyout offer is successfully made at S$0.56 (our target price), management would only need to pay S$44m (net value of Valuetronic’s cash and AFS assets) for the remainder. 
  • Recall that the company has been generating S$7m-50m of free cash flow p.a. from FY12-15.


Brandon Ng Chenhao CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-09-22
UOB Kay Hian Analyst Report BUY Maintain BUY 0.56 Same 0.56


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