Valuetronics Holdings (VALUE SP) - UOB Kay Hian 2017-08-15: 1QFY18 Results Above Expectations; Growth To Continue In FY18

Valuetronics Holdings (VALUE SP) - UOB Kay Hian 2017-08-15: 1QFY18 Results Above Expectations; Growth To Continue In FY18 VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings (VALUE SP) - 1QFY18 Results Above Expectations; Growth To Continue In FY18

  • Valuetronics posted strong 1QFY18 results with net profit up 64.8% yoy to HK$48.7m due to the absence of LED lighting revenue in 1QFY17 and continued growth in the industrial and commercial electronics segment. 
  • Gross margins have been impacted slightly due to a change in sales mix. 
  • Tech-related stocks have done enormously well this year and the earnings momentum should continue for the rest of FY18.
  • Maintain HOLD with a higher PE-based target price of S$0.94. Entry price: S$0.85.



RESULTS

  • Valuetronics's 1QFY18 sales grew 45.7% yoy due to the absence of smart LED lighting revenue in 1QFY17 and increased orders from existing industrial and commercial electronics (ICE) customers. Valuetronics started smart LED production only in 2QFY17. 
  • Commercial electronics (CE) revenue grew from HK$165m in 1QFY17 to HK$317m in 1QFY18 while ICE revenue grew from HK$313m in 1QFY17 to HK$379m in 1QFY18. 
  • Net profit rose by 64.8% yoy in 1QFY18 due to higher operating leverage even though gross margins came down slightly.

Gross margins down slightly. 

  • FY17 gross margins fell 1.0% from 16.0% in 1QFY17 to 15.0% in 1QFY18. The group saw a negative change in sales mix with the higher-margin ICE segment revenue forming 54.5% of 1QFY18 sales vs 65.4% in 1QFY17. This resulted in a lower gross margin for 1QFY18.

Net cash formed a substantial portion of market capitalisation. 

  • Valuetronic’s net cash position stood at HK$719m or about 33% of its current market capitalisation. Should available-for-sale (AFS) financial assets be included, Valuetronics’ net cash plus AFS financial assets would total HK$814m or about 37.5% of current market capitalisation. AFS financial assets comprise mostly of investment grade US dollar-denominated bonds.
  • Over 93% of the company’s cash and cash equivalents are deposited in reputable financial institutions in Hong Kong with the balance mainly in China.


INVESTMENT HIGHLIGHTS


Signs pointing toward continued growth in FY18. 

  • In the ICE segment, Valuetronics is exposed to a variety of sectors such as the automotive segment, temperature sensing and printer segment. We expect growth to come from the printer and automotive division. The group successfully penetrated the automotive segment in FY16 and started supplying incar connectivity to its only customer. In addition, the group has successfully been qualified by another automaker served by its only customer. It may take some time before this new automaker starts contributing. 
  • The CE segment growth is likely to continue from the production of smart LED lighting products with Internet-of-things (IoT) features as such products gain more popularity. 
  • Valuetronics will continue to pursue opportunities in the automotive industry with an aim to expand its product portfolio and customer base.

Update on Danshui factory. 

  • Valuetronics has two productions facilities, one at Daya Bay and the other at Dan Shui in China. The Dan Shui factory’s existing lease will expire in 2021 and the company is currently exploring options to either renew the existing lease, consolidate its production at Daya Bay or to relocate to a new production facility. 
  • Should the existing lease not be renewed, it will incur significant capex (>HK$100m) to the firm as they will have to build a new facility.


EARNINGS REVISION/RISK

  • We raise our FY18-20 net profit estimates by 5.1-5.8% on the back of higher than expected sales from the new wireless lightning products and automotive segment. 
  • The company has a dividend payout policy of 30-50%. Given its huge net cash, we think Valuetronics is likely to maintain a dividend of HK$0.20/share for FY18, implying a yield of 3.8%.


VALUATION/RECOMMENDATION

  • Maintain our HOLD recommendation but with a higher PE-based target price of S$0.94 (previously S$0.80), pegged peers’ average PE of 11.7x for FY18. 
  • We remove our 10% discount on peers’ FY18 PE as we understand that the new automaker customer is currently undergoing trial production which will reduce the customer concentration risk for Valuetronics.


SHARE PRICE CATALYST

  • Additional customers in the IoT space.
  • Additional customers in the automobile space.
  • Higher-than-expected dividends.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.94 Up 0.80



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