Valuetronics Holdings Ltd - CIMB Research 2018-02-12: 3QFY3/18 Firing On All Cylinders

Valuetronics Holdings Ltd - CIMB Research 2018-02-12: 3QFY3/18 Firing On All Cylinders VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - 3QFY3/18 Firing On All Cylinders

  • Valuetronics Holdings' 3QFY18 core net profit (+30% y-o-y) at 29% of our/consensus full-year forecasts (9M18: 82%), deemed a beat despite slight seasonality weakness in 4QFY18F.
  • Auto connectivity modules and printers led double-digit ICE sales growth y-o-y and q-o-q.
  • CE sales to benefit from new series and wider market penetration of smart lighting.
  • We do not expect supply chain issues, high utilisation level and Danshui lease expiry to significantly inhibit Valuetronics’s long-term growth.
  • We raise our FY18-20F EPS by 5.2-8.2% on higher sales assumptions, but our Target Price remains intact at S$1.10 after factoring higher S$/HK$ FX rate. Maintain ADD.

Another record quarter in 3QFY18 

  • Valuetronics reported 3QFY18 core net profit of HK$56m, above our and Bloomberg consensus expectations. Industrial and commercial electronics (ICE) and consumer electronics (CE) segments both saw y-o-y and q-o-q growth during the quarter, which coupled with good cost control, contributed to 30% y-o-y increase in core net profit in 3Q (9MFY18: +42% y-o-y). 
  • Gross margin fell from 3QFY17’s 15.5% to 14.4% as a result of product mix changes; ICE and CE segments now make up 50/50 of overall topline.

Automotive connectivity modules, printers led ICE growth 

  • We were positively surprised by the double-digit y-o-y and q-o-q sales growth for ICE, which were driven by
    1. higher volume of in-car connectivity modules, and
    2. increasing printer sales from both new and existing customers. 
  • It has started mass production for certain products for its 2 nd automotive customer; we believe this would help contribute to earnings growth from FY19F onwards. 
  • We also think Valuetronics could potentially benefit from its auto OEM customer’s recent spin-off, in the form of new product types.

CE segment to grow along with more smart LED lighting series 

  • Backed by both consumer lifestyle and smart LED lighting products, Valuetronics’s CE revenue recorded 48.1% y-o-y and 5.4% q-o-q growth in 3QFY18. While sales of its 2 nd generation series of wireless lighting continue to perform well, its 3 rd and 4th generation series are already in the pipeline, with added features and enhancements. 
  • If Valuetronics succeeds in winning these new projects from the Dutch MNC, the rising market penetration of these new products could possibly give the company another leg up.

Key issues addressed 

  • Major concerns raised in Valuetronics's analyst briefing were:
    1. supply chain challenges,
    2. utilisation level, and
    3. Danshui lease expiry in 2021. 
  • Certain raw materials continue to be in shortage, but reprieve is likely in the coming quarters amid cuts in global smartphone production. 
  • We are also not overly concerned with the high utilisation level of its surface mounting technology (SMT) lines and plastic injection machines (80-90%), which could be resolved via higher automation. Discussion on Danshui lease renewal is still ongoing.

Reiterate ADD on higher EPS; Target Price unchanged at S$1.10 

  • As we raise our revenue assumptions for both ICE and CE, our FY18-20F EPS increased by 5.2-8.2%. Our Target Price is intact at S$1.10 (pegged to 11x CY19F P/E, in line with industry average) as we factor in higher S$/HK$ exchange rate. 
  • We maintain our ADD call on the stock which offers 4% FY18-20F dividend yield. 
  • Synergistic M&As and new customer wins are potential key catalysts, while unexpected order delay and cancellation are downside risks.

NGOH Yi Sin CIMB Research | 2018-02-12
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.100 Same 1.100