Valuetronics Holdings Ltd - CIMB Research 2017-05-29: 4Q17 New Orders In Ramp-up Phase

Valuetronics Holdings Ltd - CIMB Research 2017-05-29: 4Q17 New Orders In Ramp-up Phase VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 4Q17 New Orders In Ramp-up Phase

  • FY3/17 core net profit of HK$151m was ahead of our/consensus full-year numbers.
  • We expect both CE and ICE segments to continue their double-digit sales growth in FY18F, thanks to roll-out of newly-launched products.
  • Lower operating cash flow in FY17, but cash conversion cycle is steady at 42 days.
  • Maintain Add with a higher TP of S$0.89 (11x CY18 P/E, a narrower discount of 10% to peers’ average). Valuetronics currently trades at 11.2x FY18 P/E (6.3x ex-cash).

Results beat by a better-than-expected 4Q17 

  • Valuetronics reported FY3/17 topline of HK$2,275m (+16.5% yoy) and core net profit of HK$151m (+25.1% yoy), above our forecasted HK$2,123m and HK$137m respectively.
  • The results beat mainly came from a stronger-than-expected 4Q17, as sales climbed 44.0% yoy and 8.3% qoq, due to the building of inventory ahead in 3Q17 and delivered in 4Q17. 
  • Gross margin dipped to 14.2% (3Q17:15.5%) during the seasonally-weaker quarter, leading to a 5.3% qoq fall in 4Q17 core net profit (HK$40.9m, +36.4% yoy).

CE and ICE firing up 

  • Both industrial & commercial electronics (ICE) and consumer electronics (CE) segments registered strong growth in FY17 at 14.1% and 19.7% yoy respectively, driven by the automotive (AU) connectivity modules and wireless lighting with IoT features. 
  • We expect such sales momentum to be sustained into FY18F as these new products enter mass production and initial phase of product lifecycle respectively, underpinning our FY18-20F sales forecasts of 10-12% p.a. 
  • We also estimate gross margins to trend downwards.

Qualification by another automaker still underway 

  • Valuetronics also announced a recent award win for supplier excellence with its major AU customer (tier-1 automotive parts manufacturing company), reflecting its integral role as part of the supply chain for two years. 
  • While the audit completion by a new OEM for its AU connectivity modules has been postponed to end-FY18, we think this could give the firm another leg-up when the new orders kick in. 

Lower operating cash flow, but steady cash conversion cycle 

  • Valuetronics recorded FY17 operating cash flow of HK$161m, lower than FY16’s HK$289m as a result of more cash tied up in working capital. Its cash conversion cycle was stable at 42 days in FY17, vs. 45 days in FY16. 
  • The company remains in a net cash position (with zero borrowings), that makes up c.39% of its market cap (excluding AFS assets).

Potentially limited dividend upside in the near-term 

  • The company declared final DPS of 15 HKcts and special DPS of 5 HKcts, implying 4.4% FY17 dividend yield. 
  • We suspect near-term upside to dividend payout may be capped (30-50% dividend policy) as higher business activities may require more working capital, and key customers request for more favourable credit terms. 
  • There is also a possibility of non-renewal of the Danshui factory lease (expires by end-2020), which may result in setting aside more capex should management decide to look for an alternative site.

Maintain Add on higher EPS estimates 

  • We raise our FY18-19F EPS estimates by 5.7-12.9%, to factor in higher sales growth, gradually declining gross margins and lower operating costs. 
  • We also introduce FY20 forecasts, and our TP thus increases to S$0.89 (adjusted for 1:10 bonus issuance). This is pegged to 11.0x CY18 P/E (prev. 9.8x), now at a smaller 10% discount to industry average of 12.2x. 
  • The stock offers 4.3-4.8% FY18-20F dividend yield. 
  • Risks to our Add call include unexpected order pushback.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-29
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.89 Up 0.720