Valuetronics Holdings - UOB Kay Hian 2015-11-17: FY16 Will Be A Pivotal Year For Valuetronics

Valuetronics Holdings - UOB Kay Hian 2015-11-17: FY16 Will Be A Pivotal Year For Valuetronics VALUETRONICS HOLDINGS LIMITED BN2.SI 

VALUETRONICS HOLDINGS (VALUE SP) - FY16 Will Be A Pivotal Year For Valuetronics 

  • FY16 will be a pivotal year for Valuetronics as it transitions from CE to ICE. 
  • Despite the drop in net profit, we note the underlying growth in the ICE segment which will propel Valuetronics back to profit growth from FY17 onwards. 

VALUATION 

  • Maintain BUY with a slightly lower target price of S$0.54 based on 8.3x FY17F PE. 

RESULTS 

  • Net profit in 2QFY16 continues to be affected by a slowdown in the consumer electronics (CE) business, which was partially offset by strong growth from the higher margin industrial and commercial electronics (ICE) segment. 
  • Valuetronics generated S$18m of free cash flow in 1HFY16, boosting its net cash position to S$93.2m. If we include available for sale (AFS) assets (investablegrade US dollar fixed-income bonds), Valuetronics will have net cash plus AFS which would translate to S$0.286/share. 


OUR VIEW 


CE continues to be a drag, but should bottom in FY16. 

  • CE revenue plunged 40.6% yoy as LED products approached their end-of-life stage. We estimate LED segment to have formed about 10% of profit in 2QFY16. 
  • Going forward, CE is expected to comprise mostly of consumer lifestyle products where sales have been stable, suggesting earnings drop due to declining LED sales may bottom in FY16. 

ICE drives home the win, and to be stronger in FY17. 

  • Revenue from the ICE segment grew 27.7% yoy driven by higher demand from existing customers and a new automotive customer. With US automotive sales on track to see its best year in a decade and China’s automotive sales getting a boost after the government cut purchase tax, Valuetronics sees potential for further growth. 
  • Valuetronics has also secured two new ICE customers who will contribute from 2QFY17 onwards. 
  • Trim our FY16-18F earnings by 2-5%, as we factor in the steeper decline in LED sales for 3Q/4QFY16 that was partially offset by stronger growth from ICE segment. 

More shareholder friendly-going forward? 

  • While there have been plans to build a new factory, we understand that we may not see any related developments in the next 12 months. If it does happen, Valuetronics may incur capex of about HK$100m, which may be one of the reasons why Valuetronics has been investing in AFS assets which expanded to HK$86.4m. 
  • With potential capex being “saved” and continuous robust cash flow generation, Valuetronics may be more willing to reward shareholders further either through interim dividends or share buybacks. 

First share buyback at S$0.425. 

  • Valuetronics repurchased 100,000 shares at S$0.425, representing about 15% of the volume traded on 13 Nov. This is Valuetronic’s first buyback in nearly five years, and we believe this is a show of confidence in Valuetronic’s strong financials and future profitability. This may serve as a support to share price which is also underpinned by an attractive 8.5% yield.


Brandon Ng Chenhao CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-17
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.54 Down 0.56


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