Valuetronics - RHB Invest 2015-11-16: A New Dawn Ahead

Valuetronics - RHB Invest 2015-11-16: A New Dawn Ahead VALUETRONICS HOLDINGS LIMITED BN2.SI 

Valuetronics (VALUE SP) - A New Dawn Ahead 

  • Valuetronics’s 2Q16 earnings missed our expectations slightly, with 1H16 NPAT down 6.4% YoY despite revenue dipping 14.2%, mainly due to the rapid decline in the LED segment which was unexpected. 
  • Management has guided that earnings from LED segment should likely be non-existent from 3Q16 onwards. 
  • As a result, we have removed the bulk of the LED earnings contribution from 2H16 onwards and lower our FY16 NPAT estimates by 9.8%, resulting in a lower TP of SGD0.57

 Impacted by rapid LED decline. 

  • 2Q16 earnings were impacted negatively by the rapid decline in the LED segment, resulting in revenue contribution from the Consumer Electronics (CE) business segment to drop 40.6% YoY. 2Q16 NPAT was down 11.3% YoY with revenue declining 14.2% YoY. 
  • 1H16 NPAT slightly dipped by 6.4% to HKD 65.7m. The strong growth momentum in Industrial and Commercial Electronics (ICE) segment continued in 2Q16, surging 27.7% YoY. 

 LED revenue contribution to be minimal going forward. 

  • With up to 90% of the existing LED product’s life ended in 2Q16, there will only be 10% (HKD38.7m) of revenue left to be recognized in 2H16. This means that LED revenue contribution would likely be non-existent/very minimal going forward. 
  • From our estimates, ICE is likely to account for c.57% of FY16’s total revenue, with CE making up the remaining 43%. 

 Staying positive, maintain BUY. 

  • Although the speed of the decline of the LED contribution was somewhat unexpected, we remain positive on the stock for the following reasons. 
  • Firstly, LED products has the lowest GPM of 6-8% compared to the rest of the products from Valuetronics and has been suffering cost pressures due to the 10% YoY decline in ASP. 
  • Secondly, it is likely to contribute less than 10% of FY16F’s NPAT despite accounting for c.30% of FY16F’s revenue. 
  • Thirdly, factory space and equipment previously used for the LED products can also be used for its other consumer products or fast growing ICE segment. 
  • As a result, we have removed LED earnings contribution from our FY16 forecasts and adjusted our FY16 NPAT estimates by 9.8%, resulting in a lower DCF-based TP of SGD0.57 (from SGD0.62) (WACC: 12%, TG: 0%). 
  • Going forward, ICE segment growth momentum should likely continue and improve profitability for FY17F. 
  • Backed by a 8.2% FY16 yield, we Maintain BUY.

Jarick Seet RHB Research | 2015-11-16
RHB Research SGX Stock Analyst Report BUY Maintain BUY 0.57 Down 0.62