Valuetronics Holdings - UOB Kay Hian 2016-05-27: FY16 Results In Line With Expectations; Automobile Segment To Spur Growth

Valuetronics Holdings - UOB Kay Hian 2016-05-27: FY16 Results In Line With Expectations; Automobile Segment To Spur Growth VALUETRONICS HOLDINGS LIMITED BN2.SI 

Valuetronics Holdings (VALUE SP) FY16: Results In Line With Expectations; Automobile Segment To Spur Growth

  • FY16 net profit fell 19.3% yoy to HK$120.4m as the mass-market low-margin LED business reached its end-of-life cycle. 
  • We raise our forecast to account for the potential double-digit growth in the automobile segment. 
  • Valuetronics is trading at 7.8x FY18F PE (ex-cash: 2.7x) with a potential dividend yield of 7.5%
  • Maintain BUY with a higher target price of S$0.60.


RESULTS


FY16 net profit fell 19.3% yoy to HK$120.4m, largely due to its exit from the mass- market LED light bulbs segment. 

  • Revenue declined 19.6% yoy to HK$1,952.9m. The consumer electronics (CE) segment contributed 42.2% of total revenue, down from 60.6% in FY15. 
  • Meanwhile, industrial and commercial electronics (ICE) sales rose from HK$956.3m in FY15 to HK$1,128.3m in FY16, mainly due to the increase in demand from ICE customers and the company adding a new customer in the automobile industry. 
  • We estimate the mass-market LED light bulbs segment contributed about HK$230m in FY16.

Margins on the rise. 

  • The exit from the low-margin mass-market LED light bulb segment has resulted in an increase in gross margin to 15.2% in FY16 (FY15: 13.6%). 
  • Net margin rose 0.1ppt from 6.1% in FY15 to 6.2% in FY16.

Cash is king. 

  • As of 31 Mar 16, net cash stood at S$0.32/share, up from S$0.24 in FY15. Net cash per share formed about 65% of the company’s market capitalisation. 
  • Including available-for-sale (AFS) financial assets, net cash per share would be S$0.35, or 72% of market capitalisation. AFS financial assets comprise mostly US$ investment-grade bonds, giving yields of 2-3%. The group continues to maintain very prudent balance sheet practices with no debt.

Dividends. 

  • Valuetronics has proposed a final dividend of 13 HK cents/share and a special dividend of 7 HK cents/share, which amount to a payout ratio of about 63%.



INVESTMENT HIGHLIGHTS


Automobile segment to drive growth. 

  • In FY16, Valuetronics acquired its first customer in the automobile industry - one of the world’s largest tier-1 automobile system manufacturer with a global footprint. 
  • Valuetronics will supply data and media connectivity modules to the customer. The modules are for portable smartphone/tablets devices and in-car infotainment systems, allowing users to safely access content in their vehicle through emerging infotainment software solutions. Since the customer was only acquired in the middle of FY16, we estimate it contributed only 5-10% of Valuetronics’ total revenue in FY16. 
  • Going forward, we expect this segment to grow 15-20% annually as manufacturers respond to an increasing customer preference to integrate their smartphones and tablets with their vehicles.

• Stable margins. 

  • We expect gross margin to hover at 14-16% in FY17 even with the full exit from the low-margin LED light bulb segment as gross margin in the new automobile segment is not as high as that in the other ICE segments.

A cash-backed investment. 

  • With the exit from the mass-market LED light bulb segment, working capital has significantly improved on the back of better group credit terms and the cash conversion cycle improving from 55.9 days in FY15 to 44.8 days in FY16. As a result, Valuetronics’ net cash plus AFS securities positions have ballooned to S$0.35/share
  • We believe this should form a strong support for share price.



EARNINGS REVISION/RISK

  • We adjust our net profit estimates by -3% for FY17 and +7% for FY18 to account for the slower growth in the CE segment and higher-than-expected growth in the automobile ICE segment.



VALUATION/RECOMMENDATION

  • Maintain BUY with a higher PE-based target price of S$0.60 (previously S$0.52), pegged to peers’ average PE of 9.5x for FY18. 
  • The company has a dividend policy of 30- 50% payout ratio. Given its large net cash position, we think Valuetronics is likely to maintain dividend per share of HK$0.20 for FY17, implying a yield of 7.5%.



SHARE PRICE CATALYST

  • Additional customers in the automobile ICE segment.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-27
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.60 Up 0.52


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