Valuetronics Holdings Ltd - CIMB Research 2017-11-13: 2QFY3/18 Order Backlog Still Strong

Valuetronics Holdings Ltd - CIMB Research 2017-11-13: 2QFY3/18 Order Backlog Still Strong VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 2QFY3/18 Order Backlog Still Strong

  • Valuetronics' 2QFY18 core net profit of HK$51m was in line with our/Bloomberg consensus expectations. 1HFY18 core net profit formed 54% of our FY3/18F forecast.
  • Consumer Electronics (CE)’s IoT-enabled lighting product is still in ramp-up phase, with development of third-generation series underway.
  • Robust Industrial & Commercial Electronics (ICE) order backlog for automotive connectivity modules despite near-term supply chain pressure; we expect sales contribution from its 2nd AU OEM in FY19F.
  • Interim DPS of HK$0.07 declared; the stock offers 3.8% FY18-20F dividend yields.
  • Maintain Add with higher TP of S$1.10 (pegged to 11x CY19F P/E) for higher EPS and valuation rollover. Synergistic M&As are a potential key catalyst.

2QFY18 topline up 26% yoy, 4% qoq 

  • Valuetronics' 2QFY18 topline rose 26% yoy and 4% qoq, led by both consumer electronics (CE) and industrial & commercial electronics (ICE) segments, with continued manufacturing ramp-up of smart home lighting and automotive connectivity modules. 
  • Gross margin dipped slightly from 14.6% in 2QFY17 to 14.4% in 2QFY18 due to sales mix changes (less profitable CE segment comprised 52% of sales in 2QFY18 vs. 46% in 2QFY17). 
  • Core net profit rose 33.5% yoy and 2.2% qoq to HK$51m, with higher operating leverage.

CE’s smart lighting product sales have not peaked yet 

  • CE’s wireless lighting product with Internet of Things (IoT) features was the star performer this quarter, driving revenue growth of 46% yoy and 20% qoq. We believe this product is still in the early phase of its life cycle, as it only has high penetration rate in the US and there are plans for the development of third-generation products in the near term.
  • Valuetronics currently produces second-generation products for a leading Dutch manufacturer, which contributed 20-25% of its 1HFY18 revenue.

ICE order backlog strong; Sole supplier for 2nd AU OEM 

  • Management cited limited supply of critical components as the main reason for the slight qoq drop in 2QFY18 ICE sales. This supply chain challenge is not unique to Valuetronics, whose key automotive (AU) customer is taking steps to address. 
  • Meanwhile, we continue to be positive on Valuetronics' auto segment as its order backlog remains strong, and we expect earnings contribution in FY19F onwards from its 2nd AU OEM (a US-listed, nontraditional automaker).

Declared HK$0.07 interim DPS 

  • Valuetronics declared interim DPS of HK$0.07 in 2QFY18 (2QFY17: nil), putting it on track to meet our FY18F DPS forecast of HK$0.22, which translates into annual dividend yield of 3.8%. 
  • Despite recording higher capex of HK$61m in 1HFY18 (1HFY17: HK$7m), the company remains in a strong net cash position (zero debt), with S$0.30 net cash/share (including available-for-sale, AFS, assets) at end-2QFY18.

Maintain Add with slightly higher TP of S$1.10 

  • We raise FY18-20F EPS by 3.1-5.2% for higher sales assumptions, offsetting lower gross margins and enlarged share base. Hence, our target price increases to S$1.10 as we rollover to end-CY19F P/E of 11x (in line with global industry average) vs. 11.9x previously. 
  • Maintain Add as VALUE offers attractive FY18-20F dividend yields of 3.8%, with synergistic M&As as a potential key catalyst. 
  • Unexpected order delay and cancellation pose downside risks to our Add call.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-11-13
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.10 Up 1.020