Valuetronics Holdings Ltd - CIMB Research 2017-09-25: Key Takeaways From Hong Kong NDR

Valuetronics Holdings Ltd - CIMB Research 2017-09-25: Key Takeaways From Hong Kong NDR VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - Key Takeaways From Hong Kong NDR

  • Recent HK NDR allayed investors’ concerns on
    1. customer concentration,
    2. cash pile optimisation and
    3. capacity constraints. 
    Reiterate Add on Valuetronics.
  • Client concentration risk is significantly lower now with a diversified product portfolio.
  • Estimated HK$500m of strategic assets for M&As, with little risk to dividend payout.
  • Capacity is not an issue for Valuetronics' near-term growth, in our view.
  • We like the stock for its earnings outlook, 4.4% dividend yield and undemanding 10.4x CY18 P/E. 
  • Maintain Target Price of S$1.02 (11.9x CY18 P/E, 5% discount to industry average). 

Reiterate our Add call post NDR. 

  • We recently hosted Valuetronics on a non-deal roadshow (NDR) in Hong Kong, where investors were generally impressed with the company’s track record and business prospects. Key questions revolved around:
    1. customer concentration,
    2. cash utilisation, and
    3. capacity constraints. 
  • Post its NDR, we continue to like the stock for its 3-year EPS CAGR of 15.3%, decent 4.4% dividend yield and undemanding valuation of 10.4x CY18 P/E (6.5x on ex-cash basis). Reiterate Add.

Expanding customer base alleviates concentration risk 

  • While Valuetronics used to depend heavily on a single customer, supplying mass-market LED lighting and consumer lifestyle goods to a Dutch MNC, such a concentration has reduced significantly when the company made a strategic decision to exit the less-profitable LED lightbulbs and successfully penetrate into the automotive (AU) sector. 
  • Four major customers, representing different industry segments, contributed to c.60% of its FY17 topline, vs. two customers that generated 66% of its FY13 revenue.

FY18-20F growth prospects intact 

  • We expect the robust sales momentum to sustain after the 1QFY18 results beat (+71% yoy, +22% qoq), underpinned by double-digit revenue growth in wireless light bulbs, transaction printers and AU connectivity modules. 
  • Recent qualification by 2nd AU OEM should translate into earnings contribution from FY19F onwards; while rising global adoption of smart home lighting and diversification to other product types with existing AU client are potential longer-term drivers.

Three important “Cs” – Customer, Cash, Capacity 

Improved customer concentration profile 

  • An electronic manufacturing services (EMS) provider that operates in consumer electronics (CE) and industrial & commercial electronics (ICE) segments, Valuetronics has a diverse customer base whose sales mix continues to improve over the years. There are 15 major clients that each account for at least 3% of its total revenue. 
  • While four of these customers contribute c.60% of its FY17 topline, they represent different industry segments, specifically consumer lifestyles, smart lighting with IoT features, transaction printers and automotive. 
  • The company also continues to be in talks with potential new customers, hence mitigating customer concentration risk.

HK$500m cash a strategic asset 

  • The company recorded HK$719m in net cash (HK$814m if including AFS investments) as of end-1QFY18, making up c.35% of its market cap. Apart from working capital requirements of HK$200m, Valuetronics is equipped with at least a HK$500m war chest for synergistic M&A opportunities. 
  • Amongst the various possibilities, we think M&A targets that could offer
    1. addition to existing product portfolio and new clientele,
    2. expansion of capability, or
    3. geographical presence extension, would most appeal to the company. 
  • Backed by more than 10 years of organic growth and an experienced leadership team (including a more mature second-generation management), the company is now poised to actively pursue inorganic expansion.
  • We also see little threat from potential inorganic growth plans to its 30-50% dividend payout ratio, as Valuetronics’s internally-generated cash of HK$200m per year (on average over the past 5 years) should be sufficient to support its annual dividends of HK$90m-95m going forward.

Capacity not an issue in the near-term 

  • Despite a current 80-90% utilisation level for its production lines, we do not see this as a key capacity constraint given that the purchase of machines is not too expensive and typically requires 3-4 months’ lead time. 
  • In terms of production floor area, the company still has 25% idle space which should accommodate any capacity expansion for the next 12-18 months, according to management.
  • Increasing automation efforts will not only help improve efficiency and reduce manpower needs, but also possibly replace 3-4 old production lines.
  • Moreover, Valuetronics has an unused plot of land at its existing Daya Bay facility. Management estimates that construction of a 5-storey building at the empty site will take about 1 year and HK$100m of infrastructure costs, should the need arise.


Maintain Add rating 

  • We remain positive on the growth prospects for Valuetronics, underpinned by double-digit growth in
    1. transaction printers,
    2. wireless home lighting, and
    3. automotive connectivity modules. 
  • Maintain Add on the stock with unchanged target price of S$1.02 (pegged to 11.9x CY18 P/E, 5% discount to industry average). 

Trading at over 35% discount to Venture 

  • Valuetronics currently trades at 10.4x CY18 P/E with a 15.3% 3-year EPS CAGR, vs Venture Corp’s 16.6x P/E and 22.7% CAGR. It is however trading at a 15% discount to peers which exhibit weaker earnings profiles. 
  • We believe the earnings contribution of its 2nd AU OEM would be the key catalyst, while downside risks could stem from order pushback or cancellation.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-09-25
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.020 Same 1.020