Valuetronics Holdings - UOB Kay Hian 2016-02-04: 3QFY16 ~ 95% Of Market Capitalisation Backed By Net Cash And AFS Financial Assets

Valuetronics Holdings - UOB Kay Hian 2016-02-04: 3QFY16 ~ 95% Of Market Capitalisation Backed By Net Cash And AFS Financial Assets VALUETRONICS HOLDINGS LIMITED BN2.SI 

Valuetronics Holdings (VALUE SP) - 3QFY16: 95% Of Market Capitalisation Backed By Net Cash And AFS Financial Assets 

  • 3QFY16 net profit fell 35.8% yoy to HK$25.2m as the mass-market low-margin LED business reached its end-of-life cycle. 
  • We adjust our forecast accordingly on the back of a steeper-than-expected decline in LED sales, which was partially offset by stronger growth from the ICE segment. 
  • Valuetronics is trading at FY17F PE of 6.4x (ex-cash of 0.9x) with a dividend yield of 9.5%. 
  • Maintain BUY. Target price: S$0.52. 


RESULTS 


3QFY16 net profit fell 35.8% yoy to HK$25.2m, 

  • ... largely due to lower revenue from the consumer electronics (CE) segment. 
  • Revenue declined 27.1% yoy to HK$434.5m as the mass-market LED light bulbs from the CE segment reached their end-of-life cycle. 
  • As of this quarter, Valuetronics Holdings (Valuetronics) is completely out of the low-margin, very competitive mass-market LED consumer segment. 

Accordingly, gross profit decreased 15.8% yoy to HK$70.5m 

  • ...but gross margin improved to 16.2% from 14.0% in 3QFY15, mainly attributable to the increased contribution from the higher-margin industrial and commercial electronics (ICE) segment. 
  • Revenue from this segment rose 24.9% yoy to HK$293.5m due to higher demand from existing and new ICE customers. 

With a prudent cash management effort, net cash grew to HK$681.8m as at 31 Dec 15 

  • ... and if its HK$74.5m of available-for-sale financial assets (AFS) were to be included, net cash with AFS per share would stand at S$0.365, forming 95% of the share price. 


INVESTMENT HIGHLIGHTS 


• No more mass-market LED. 

  • As of 3QFY16, management shared that the company no longer does the low margin mass-market business. 
  • Workers and floor space have been redeployed successfully with minimum redundancy. 
  • Going forward, CE is expected to comprise mostly of consumer lifestyle products where sales have been more stable. 

• ICE segment to fill up capacity. 

  • Growth in the ICE segment was driven by higher demand from existing customers and a new automobile customer. 
  • As it takes a longer time to obtain qualification and certification with the automobile customer, we think that revenue from this segment (albeit small but growing) tends to be more resilient. 
  • With US automobile sales on track due to low gasoline prices and easy credit, and with China’s automobile sales getting a boost after the government cut purchase tax, Valuetronics sees potential for further growth. 

• 95% of market capitalisation is cash. 

  • With better credit terms, cash conversion cycle improved from 55.9 days in FY15 to 47.2 days in 3QFY16, and as a result, Valuetronics’ cash pile rose to HKS$681.7m. 
  • Coupled with AFS financial assets and zero bank borrowings, net cash and AFS grew to HK$756m or S$0.365 per share. This, we believe, should form a support for the share price. 


EARNINGS REVISION/RISK 


However, we have trimmed our FY16-18 earnings by 10-17%, 

  • ... as we factor in the steeper decline in LED sales for FY16 which will be partially offset by stronger growth from the ICE segment. 


VALUATION/RECOMMENDATION 


Maintain BUY but with a lower target price of S$0.52, 

  • ... as we cut our earnings forecast for the next three years. This is pegged to its peers’ average PE of 8.7x and FY17 EPS of S$0.06. 
  • While the company has a formal dividend policy of 30-50% payout ratio, management shared that there is still flexibility in the dividend policy, subject to board approval. 
  • Given the large net cash position, we think Valuetronics is likely to maintain a dividend/share of HK$0.20 for FY16, a dividend yield of 9.5% but a payout ratio of 67%. 
  • At the current share price, the company is trading at a FY17F PE of 6.4x (ex-cash of 0.9x).



Brandon Ng Chenhao CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.52 Down 0.54


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