Valuetronics - RHB Invest 2016-02-04: Bags Full Of Cash

Valuetronics - RHB Invest 2016-02-04: Bags Full Of Cash VALUETRONICS HOLDINGS LIMITED BN2.SI 

Valuetronics - Bags Full Of Cash 

  • 3Q16 results were slightly below expectations, with topline and NPAT down 27.1% and 35.8% YoY respectively. 
  • Maintain BUY with lower DCF-backed SGD0.50 TP (vs SGD0.57, 28% upside), implying 8.5x FY16F P/E. 
  • Higher administrative expenses from its workforce reallocation and new automotive projects lead to a 15% drop in our FY16F NPAT. 
  • However, its excess cash position from a combination of bonds and a net cash balance of USD98.5m, almost equivalent to its current market cap, could see it declare a 9% dividend yield and even a potential special dividend. 

Overhang from the mass market LED light bulb removed. 

  • Valuetronics’ 3QFY16 (Mar) results were below our and consensus’ expectations, with its topline and NPAT decreasing 27.1% and 35.8% YoY respectively, mainly due to the cessation of the mass market LED light bulb production. 
  • This was, however, cushioned by a 25% increase in industrial and commercial electronics (ICE) revenue, which improved overall gross profit margin to 16.2% (3QFY15: 14%), due to a higher margin from the ICE segment. 

Higher-than-expected administrative costs. 

  • Previously, we had expected administrative costs to decrease due to the cessation of the mass market LED light bulb production. However, that was not the case as management has decided to redeploy the workforce to its existing and new ICE projects. 
  • As such, we do not expect these costs to increase much in the future, even with new projects won. 

ICE to be the key driver. 

  • A US customer from the automotive sector, currently contributing 10% to the overall topline, contributed much to the ICE segment’s 25% YoY revenue growth. 
  • We should continue to see strong ICE growth in 4QFY16 before slowing down to low double-digit growth in FY17 due to a much larger ICE base. 
  • However, we understand that while the new automotive customer has added much volume and earnings visibility as well as stability, its margins are a tad lower than the 19% gross margin the ICE segment currently enjoys. 
  • As a result, we expect the blended gross margin for the segment to likely normalise around 15-17%. 

Maintain BUY, share price fully backed by net cash. 

  • Due to the higher-than-expected administrative expenses, and slightly lower ICE margins due to the addition of the automotive customer, we lower our FY16 NPAT estimate by 15%, resulting in a lower DCF-backed TP of SGD0.50. 
  • As of 3QFY16, Valuetronics has a combined net cash and bonds position of SGD0.38 per share, equivalent to current price levels. 
  • With only HKD250m needed for operating cash flows, management has at least HKD250m-300m idle cash on its balance sheet. 
  • As the company is still generating ample cash, we expect management to at least maintain its past year’s dividend of HKD0.20/share despite our forecast of a drop in FY16 NPAT. 
  • In addition, we would also not factor out a possibility of a special dividend to reward shareholders. 
  • The key risk to our forecasts would be a greater-than-expected economic slowdown.

Jarick Seet RHB Invest | 2016-02-04
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.50 Down 0.57