Valuetronics Holdings Ltd - CIMB Research 2018-04-27: Too Early To Dim The Lights

Valuetronics Holdings Ltd - CIMB Research 2018-04-27: Too Early To Dim The Lights VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics Holdings Ltd - Too Early To Dim The Lights

  • Valuetronics’ 18% share price decline was a knee-jerk reaction to its major customer reporting sub-par sales performance of smart home lighting.
  • We are not overly concerned as such sales should normalise in 2H18 upon inventory destocking; Valuetronics is still a beneficiary of IoT trends and customer wins.
  • Maintain ADD as we see value emerging for the stock despite weak sector sentiment.

Major customer reports poor smart home sales in US

  • One of Valuetronics’ major customers, a Dutch MNC, recently reported 1Q18 earnings miss, due to weak sales of their home lighting division (-6.4% y-o-y), notably in the US. This came on the back of lower than expected sales at its trade partners in 4Q17, who had built up excess inventory (current level: 9-18 weeks vs healthy level of 8 weeks), hence resulting in 1Q sales decline to allow for inventory reductions.
  • However, management of the Dutch MNC reassured that the positive structural trend for smart home lighting remains intact, and they continue to innovate in terms of product design. They also expect sales to normalise in 2H18 to attain their full-year target of double-digit growth, as they intensify marketing activities and diversify distribution coverage.
  • According to their results call, 2Q18 could still see some destocking effect, but to a lesser extent. We think this announcement could have caused the 18% share price fall for Valuetronics.

Look beyond the near-term noise

  • Valuetronics is currently one of the two suppliers for the second generation of these smart home light bulbs, with potential to gain orders for the third generation.
  • We estimate that this Dutch MNC accounted for about 20-25% of Valuetronics’ overall 9MFY3/18 revenue and has been one of its growth drivers since 2QFY17 (apart from auto connectivity modules and transaction printers).
  • Order visibility for consumer electronics (CE) tends to be shorter at 2-3 weeks, as compared to 6-12 months for industrial & commercial electronics (ICE) customers. In the worst-case scenario, we project 2 quarters’ impact of sales slowdown for Valuetronics, while medium-term prospects remain strong. Its 4QFY18F could be q-o-q weaker (due to seasonality) but y-o-y stronger, based on our forecasts.
  • Our topline growth assumptions of 31% and 10% for FY18F and FY19F respectively, remain unchanged given that 
    1. market penetration of smart home lighting is still low (especially outside of US), and 
    2. there will be contribution from the second auto OEM customer for its connectivity modules.

Attractive entry price; maintain Add

  • At 9x FY3/18F P/E (5x ex-cash), we think it is now an attractive entry price, supported by FY18-20F dividend yield of 5% and multi-year earnings growth. 
  • Maintain ADD with unchanged EPS forecasts and target price of S$1.10, pegged to 11x CY19F P/E.
  • Potential catalysts are stronger earnings delivery and new customer wins. 
  • Downside risks to our Add call could stem from order delay/cancellation, and multiple compression from sector de-rating.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-04-27
SGX Stock Analyst Report ADD Maintain ADD 1.100 Same 1.100