Valuetronics Holdings Ltd - CIMB Research 2017-02-13: 3QFY17 En route to re-rating

Valuetronics Holdings Ltd - CIMB Research 2017-02-13: 3QFY17 En route to re-rating VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 3QFY17 En route to re-rating

  • 3Q/9MFY17 core net profit formed 31%/81% of our FY3/17 forecasts, which we deem in line as we expect 4Q to be seasonally weaker.
  • The revenue of both CE and ICE segments increased by 92%/8% yoy in 3QFY17, with more products in the pipeline.
  • In our view, Valuetronics is still cheap at 8.7x FY17 P/E (3.5x ex-cash), given its sustainable earnings growth and attractive FY17-19F dividend yields of 6.4%.
  • Maintain Add, with higher TP of S$0.72, now pegged to 9.8x CY18 P/E (still at a 20% discount to the industry average), instead of 8.4x previously.

A remarkable 3QFY17 

  • VALUE posted a strong set of 3QFY17 results, reporting both sales and earnings growth and stable gross margin of 15.3% in 9MFY17 (vs. 15.0% in 9MFY16). 
  • 3QFY17 sales rose 2.4% qoq and 35.2% yoy, led by growth in both consumer electronics (+92% yoy) and industrial & commercial electronics (+8% yoy). Hence, 3Q/9MFY17 core net profit increased 70%/22% yoy respectively, forming 31%/81% of our full-year forecasts, which we deem in line due to the seasonally-weaker 4Q.

Higher revenue from smart consumer electronics 

  • We saw exceptional revenue growth in the consumer electronics (CE) segment (+92% yoy) in 3QFY17, partly due to VALUE’s complete exit from the less profitable, massmarket LED lighting in 3QFY16. 
  • The addition of wireless lighting, with smart control features in 2QFY17 contributed to the 3.8% qoq revenue growth in this segment.

A mixed picture for industrial & commercial electronics (ICE) 

  • In our view, sales of communication products in the ICE portfolio will struggle but this will be offset by stronger sales growth for printers and automotive modules. 
  • VALUE’s strong track record of offering high product quality and consistency resulted in it receiving a product transfer from its competitor and potentially gaining a new end-customer for connectivity modules. We expect both products to commence sales contribution in FY18F onwards.

Still cheap at 8.7x FY17 P/E (3.5x ex-cash) 

  • Operating cash flow fell to HK$57m at end-9MFY17 from HK$285m at end-9MFY16, led by a significant increase in net working capital that was in tandem with revenue growth.
  • The rising CE sales contribution from its key Dutch customer also meant extended payment terms. 
  • With zero debt and cash/share of S$0.35 (including AFS assets) at endDec 2016, VALUE currently trades at 8.7x FY17 P/E (ex-cash P/E of 3.5x).

Reiterate Add with higher TP of S$0.72 

  • No change to our FY17F EPS as we anticipate a seasonally-weak 4QFY17. 
  • We raise FY18-19F EPS marginally by 3-4% on the back of: 
    1. higher CE sales growth, and 
    2. better gross margins for ICE segment. 
  • We raise our target price to S$0.72 as we adopt a higher target CY18 P/E multiple of 9.8x (previously 8.4x), still pegged to a 20% discount to its regional peers’ average of 12.2x. 
  • We believe VALUE will re-rate, supported by sustainable earnings growth and attractive dividend yields.

FY17-19F dividend yields of 6.4%, with upside potential 

  • The stock offers FY17-19F dividend yields of 6.4%, based on our base-case scenario of 20HKcts DPS. 
  • Potential catalysts are higher-than-expected dividend payout and stronger earnings growth. 
  • Key risks to our Add call include unexpected order pushback and unfavourable US trade protectionist measures.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-02-13
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.72 Up 0.600