Valuetronics Holdings Ltd - CIMB Research 2016-11-07: 2QFY17 Riding on the Internet of Things

VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 2QFY17 Riding on the Internet of Things

1HFY17 core net profit was in line at 49%/ 53% of our/consensus FY3/17 forecasts.
Product portfolio expanded to include products with connectivity technologies and more electronic components (eg. wireless LED lighting, bathroom goods).
Zero debt, net cash/share of S$0.34 at end-Sep 2016 (including AFS). We forecast 7.2% dividend yield for FY17-19F.

FY17-19F EPS cut by 1-11% as we adjust for:
1. lower ICE sales growth in FY18- 19F,
2. lower gross margin, and
3. higher labour costs in FY18F.
Maintain Add with unchanged TP of S$0.60 (still 8.4x P/E) as we roll over to CY18.

VALUE reported 2QFY17 topline growth in both CE (+9.2% yoy) and ICE (+8.7% yoy) segments, as a result of a new wireless LED lighting product and penetration into the automotive industry, respectively. This contributed to the change in CE/ICE sales mix from 35%/65% in 1QFY17 to 46%/54% in 2QFY17, which caused gross margin to fall marginally to 14.6% in 2QFY17 (1QFY17: 16.0%, 1HFY17:15.2%).
2QFY17 core net profit rose 12% yoy (1HFY17: +3%), forming 28%/30% of our/consensus FY17 numbers.

Apart from the automotive connectivity modules that VALUE recently started producing for its first automotive (AU) customer, the company acquired two new CE customers in 2QFY17 that manufacture wireless LED lighting and develop innovative bathroom products. These contributed to the 58.7% qoq sales growth in CE, while ICE sales in 2QFY17 were comparable to 1QFY17.
VALUE is the sole supplier for the two new projects.
Other projects in pipeline are new series of automotive products and printers.

The higher level of operating activities hit VALUE’s operating cash flow, causing it to shrink from HK$121m in 1HFY16 to HK$37m in 1HFY17. Management warned that this trend may persist:
1. if there is continual revenue growth, and
2. as some strategic existing customers have requested for better credit terms.
We note, however, that cash conversion cycle was steady at 47 days in 1HFY17 (45 days in FY16, 56 days in FY15.
It has zero debt and net cash position of HK$734m (including AFS) at end-1HFY17.

We trim FY17-19F EPS by 1-11% to account for:
1. lower industrial & commercial electronics (ICE) sales growth of high single digit in FY18-19F,
2. lower gross margin, and
3. slightly higher labour expenses in FY18F (management expects minimum wages to rise in 2017 after the wage freeze in 2016).
This could be mitigated by increasing productivity efforts to protect its margins.

Our target price of S$0.60 (pegged to 8.4x CY18 P/E, at 20% discount to peers’ average to reflect its smaller market cap) and Add recommendation are unchanged as we roll over to CY18.
Our base case scenario of 20 HKcts DPS in FY17-19F implies 7.2% dividend yield.
Potential catalysts are higher-than-expected dividends and more sales orders, while unexpected order pushback is a key risk.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-07

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