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.

... 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.

...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.

... 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.

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.

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.

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.

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

... 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