Valuetronics Holdings Ltd - CIMB Research 2017-08-14: 1QFY18 Results Beat From Stronger Sales. Good Start To FY18 Earnings Highway.

Valuetronics Holdings Ltd - CIMB Research 2017-08-14: 1QFY18 Results Beat From Stronger Sales. Good Start To FY18 Earnings Highway. VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 1QFY18 Results Beat From Stronger Sales. Good Start To FY18 Earnings Highway.

  • Valuetronics' 1Q18 core net profit of HK$50m beat our/Bloomberg consensus expectations.
  • Strong sales momentum in CE (+92% yoy, +9% qoq) and ICE (+21% yoy, +10% qoq) mitigates the 1% pt decline in 1Q18 gross margin.
  • Earlier-than-expected qualification by 2nd AU OEM could pose upside risks to our FY18-20F numbers.
  • We raise our FY18-20 EPS and FY18-19F DPS forecasts; maintain Add with higher TP of S$1.02.
  • VALUE currently trades at 6.0x CY18F P/E (ex-cash) and offers 4.5% dividend yield.

1Q18 beat; core net profit +71% yoy, +22% qoq

  • Valuetronics (VALUE) reported 1Q18 core net profit of HK$50.0m (exclude FX losses), which formed 29% of our/Bloomberg consensus full-year numbers, deemed above expectations.
  • Robust topline growth (+46% yoy, +9% qoq) in both the consumer electronics (CE) and industrial & commercial electronics (ICE) segments helped mitigate the slight gross margin decline (1Q18: 15.0%, 1Q17: 16.0%), which was a result of sales mix changes.
  • The high-volume, low-mix CE segment contributed to 46% of 1Q18 revenue (vs 1Q17: 35%), with the remaining 54% stemming from the higher-margin ICE segment.

CE and ICE not losing sales momentum

  • The CE segment was the outperformer this quarter, registering yoy and qoq sales growth of 92% and 9%, respectively, thanks to contribution from the smart lighting business that commenced only in 2Q17. We expect this strong sales momentum to be sustained given that wireless lighting (with IOT features) is not only gaining popularity worldwide but also still in the early stage of adoption in Asia.
  • ICE sales also rose 21% yoy and 10% qoq, underpinned by increased demand for automotive connectivity modules and printers. With VALUE’s recent qualification by another automotive OEM (ahead of its target completion date of end-FY18F), ICE will remain its growth driver in the near term.

No debt; net cash with AFS assets make up c.41% of market cap

  • 1Q18 operating cashflow of HK$23m was lower than 1Q17’s HK$48m, attributable to higher business activity that led to an increase in inventories and trade receivables.
  • The cash conversion cycle was stable at 41.1 days as compared to 41.6 days in FY17.
  • The company has no borrowings and remains in a healthy net cash position, which makes up c.41% of its market cap (including AFS assets).

CE segment a beneficiary of smart homes 

  • Smart lighting business from its Dutch customer, which commenced revenue contribution in 2Q17, continued to lead the charge for CE segment, growing 92% yoy and 9% qoq.
  • While these wireless light bulbs are not new, having entered the market 2-3 years ago and VALUE producing its 2nd generation series, we see further potential in end market growth and penetration into Asia.

Qualification by 2nd AU OEM came earlier than expected 

  • Underpinned by increased demand for automotive connectivity modules and printers, ICE topline expanded 21% yoy and 10% qoq in 1Q18. 
  • With the recent qualification by another automotive (AU) OEM, ahead of the initial target of end-FY18, we think this sales contribution could be small in FY18F before turning more meaningful in FY19F. 
  • The company continues to work on new ICE customer acquisitions, and sees opportunities in diversifying to other product types with its key AU client.

Reiterate Add with higher EPS and DPS forecasts 

  • As we raise our sales assumptions, our FY18-20F EPS forecasts increase by 4.5-5.9%, and target price is now higher at S$1.02, pegged to industry average of 11.9x CY18 P/E (from 11x). With stronger profitability outlook, we also increase our FY18-19F DPS forecasts to HK$0.22 (previously HK$0.20), translating into 4.5% dividend yield. Maintain Add.
  • Downside risk: unexpected order cancellations or delay. 
  • Stronger earnings delivery and synergistic M&As are re-rating catalysts.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-08-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.02 Up 0.890