Valuetronics Holdings - 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.

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.

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%).

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.

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.

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.

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%.

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

Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-16

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