Valuetronics Holdings Ltd - CIMB Research 2016-12-05: Tech comes of age

VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - Tech comes of age

Based in HK, Valuetronics is an integrated EMS provider that specialises in original equipment manufacturing (OEM), which includes printed circuit board assembly (PCBA) and box-build assembly, as well as original design manufacturing (ODM).
It operates in two key segments with 40/60 sales split between consumer electronics (CE) and industrial & commercial electronics (ICE).
It produces a mix of low volume, complex products for emerging enterprises, and high volume, standard products for leading brands across America, Europe and Asia.

We expect a reversal of earnings decline in FY3/17 as the company fully exited from the competitive, lower margin mass-market LED segment in 3QFY3/16.
Together with stronger ICE sales growth on the back of newly-acquired automotive customer, gross margin expansion should lead to 6-13% projected EPS growth in FY17-19F.

The company successfully penetrated into the automotive sector, after being qualified by an OEM to produce media connectivity modules, with potential for wider adoption by other OEMs.
Apart from the new automotive customer, management continues to gain traction in diversifying its customer base with two new order wins that commenced CE revenue contribution in 2QFY3/17. Valuetronics is the sole supplier for these two new projects (smart LED lighting and innovative bathroom goods).
Other projects in the pipeline are a new series of automotive connectivity products and printers.

Valuetronics continues to command short cash conversion cycle at 47 days in 1H17, comparable to 45 days in FY16 and 56 days in FY15, despite lower operating cashflow of HK$37m in 1H17, vs. HK$121m in 1H16 due to higher level of operating activities.
We note that the company has zero debt and net cash position of HK$734m (including AFS) at end 1H17.
This war chest of cash could come in handy for potential earnings-accretive M&As, or to support higher-than-expected dividends, which could catalyse the stock.

At our base case scenario of 20 HKcts DPS, this gives us an implied dividend yield of 6.9%. The company adopts a dividend policy of 30-50% payout ratio.
We have an Add recommendation on Valuetronics with a target price of S$0.60, pegged to 8.4x CY18 P/E (20% discount to peers’ average to reflect its smaller market cap).
Its current valuation is compelling at 7.4x CY18 P/E (ex-cash P/E of 2.9x only).
Key risk to our Add call is unexpected order pushback or cancellation.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05

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