Valuetronics - RHB Invest 2018-04-30: Fundamentals Intact, A Buying Opportunity

Valuetronics - RHB Invest 2018-04-30: Fundamentals Intact, A Buying Opportunity VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics - Fundamentals Intact, A Buying Opportunity

  • Valuetronic’s share price has slumped 25% since its Dutch MNC customer reported a 1Q18 earnings miss, due to weak sales at its home lighting division.
  • Weak earnings announced by its peers as well as soft sentiment in the electronics and semiconductor sector also contributed to the share price decline. However, we think the selldown is overdone as fundamentals and growth remain intact.
  • We lower our Target Price to SGD0.96 (from SGD1.05, 41% upside), based on a lower FY19F P/E of 10x (from 11x) to reflect the weaker sentiment globally.
  • Maintain BUY.

Growth still intact, driven by ICE and automotive segments.

  • Its Industrial & Commercial Electronics (ICE) segment will likely continue to grow, due to higher demand from some of its existing customers, as well as new projects involving in-car connectivity modules used in the automotive industry. Going forward, we expect the ramp up of these products to continue in FY18, and expect ICE revenue growth to be around 10-12% per year.

Opportunities remain at its Dutch MNC customer.

  • The strong growth in Valuetronics’ CE segment in 3QFY18 (Mar) was mainly driven by smart light- emitting diode (LED) lighting products, with Internet of Things (IoT) features.
  • Despite its Dutch MNC customer reporting a 1Q18 earnings miss due to weak sales at its home lighting division, management has guided that the positive structural trend for smart home lighting remains intact, and expects sales to normalise and catch up in 2H18. 
  • Valuetronics is currently one of only two suppliers for the second generation smart light LEDs, and is in a promising position to gain more orders for the third generation LED products.

Solid balance sheet with first interim dividend given.

  • As of 3QFY18, Valuetronics had a healthy balance sheet with zero debt and net cash of HKD640.4m. We expect management to increase its dividend payout for the year, with our total dividend yield forecast of F18F of c.6.6%, which became more attractive after the share price decline.

Fundamentals intact, a buying opportunity.

  • Going forward, we expect Valuetronics’ to continue recording strong growth for the remaining quarters of FY18, due to healthy growth drivers at both its business segments, especially its ICE and automotive segments.
  • We believe the recent share price correction presents a good buying opportunity at an attractive FY18F yield of 6.6%, as we believe the recent selling is overdone. 
  • We lower our Target Price to SGD0.96, assuming a lower FY19F P/E of 10x (from 11x), due to the weaker sentiment globally across the electronics and semiconductor sector. 
  • We maintain our BUY call on the company as we believe its fundamentals and growth drivers remain intact.
  • Key risks include economic slowdown, forex risks, and raw material price fluctuations.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-30
SGX Stock Analyst Report BUY Maintain BUY 0.96 Down 1.050