Valuetronics Holdings - UOB Kay Hian 2016-08-16: 1QFY17 No Surprises, In Line With Expectations

Valuetronics Holdings (VALUE SP) - UOB Kay Hian 2016-08-16: 1QFY17: No Surprises, In Line With Expectations VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings (VALUE SP) - 1QFY17: No Surprises, In Line With Expectations

  • 1QFY17 net profit fell 11.6% yoy to HK$29.6m, attributable to the exit from the mass market LED segment. Valuetronics is trading at 8x FY18F PE (ex-cash: 3.3x) with a potential dividend yield of 7.1%. Maintain BUY and PE-based target price of S$0.60.
  • The company remains a very defensive manufacturing play with solid cash-generating characteristics and a resilient dividend yield.



RESULTS

  • 1QFY17 net profit fell 11.6% yoy to HK$29.6m (1QFY16: HK$33.5m) as Valuetronics to exited the mass-market LED light bulb segment. Revenue declined 13.2% yoy (1QFY16: HK$550m) to HK$477.5m in 1QFY17. 
  • The consumer electronics (CE) segment contributed about HK$165m of revenue, down from HK$280m in 1QFY16. Meanwhile, industrial and commercial electronics (ICE) sales rose from HK$269.8m in 1QFY16 to HK$312.5m in 1QFY17 mainly due to the increase in demand from ICE customers and a new customer in the automobile industry. 
  • We estimate the mass-market LED light bulbs segment contributed HK$130m in 1QFY16 and HK$100m in 2QFY16.

Margins on the rise. 

  • The exit from the low-margin mass-market LED light bulb segment has resulted in gross margin rising to 16.0% in 1QFY17 (1QFY16: 14.3%).

Prudent balance sheet with zero debt. 

  • As of 30 Jun 16, net cash stood at S$0.34/share, up from S$0.22/share as at 31 Dec 16. Net cash/share forms about 60% of Valuetronics’ market capitalisation. If we were to include available-for-sale (AFS) financial assets, net cash/share would have been S$0.37, or 72% of market capitalisation. 
  • AFS financial assets comprise mostly US$ investment grade bonds, giving a yield of 2-3%. 
  • The group continues to maintain a very prudent balance sheet with no debt.


INVESTMENT HIGHLIGHTS


Automobile segment to drive growth. 

  • The automobile segment will drive Valuetronics moving forward. We estimate this segment contributed more than 10% of group revenue in 1QFY17. The Global Positioning System (GPS) segment continues to face headwinds as agricultural players cut capex due to low agricultural commodity prices.

Stable margins. 

  • We expect gross margin at 14-16% for 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.


EARNINGS REVISION/RISK

  • We keep our FY17-19 core net profit estimates unchanged. The company has a dividend payout policy of 30-50%. 
  • Given its large net cash position, we think Valuetronics is likely to maintain a dividend of HK$0.20/share for FY17, implying a yield of 7.1%.


VALUATION/RECOMMENDATION

  • Maintain BUY and PE-based target price of S$0.60, pegged to peers’ average PE of 9.5x for FY18.


SHARE PRICE CATALYST

  • Additional customers in the automobile ICE segment.
  • Special dividends.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.600 Same 0.600


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