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

Valuetronics Holdings Ltd - CIMB Research 2016-12-05: Tech comes of age VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - Tech comes of age

  • An integrated EMS provider that is a beneficiary of Internet of Things (IoT).
  • Cash-generative business, zero debt with forecasted dividend yield of 6.9%.
  • 6-13% FY17-19F EPS growth at compelling valuations of 2.9x ex-cash CY18 P/E.

Integrated EMS provider

  • 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.

Overhang removed with exit from mass-market LED lighting 

  • 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.

Beneficiary of increasing adoption of connectivity technologies

  • 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.

Cash-generative business with zero debt 

  • 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.

Attractive dividend play, reiterate Add recommendation

  • 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 | 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.600 Same 0.600