Valuetronics (VALUE SP) - Maybank Kim Eng 2018-04-27: Light At The End Of The Tunnel; Buy On Dip

Valuetronics (VALUE SP) - Maybank Kim Eng 2018-04-27: Light At The End Of The Tunnel; Buy On Dip VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics (VALUE SP) - Light At The End Of The Tunnel; Buy On Dip


EPS miss by client hits VALUE share price

  • Weak IOT bulb sales at Valuetronics’ Dutch lighting customer caused the latter to miss 1Q18 consensus earnings estimates. This was due to short-term inventory issues at the customer’s end trading partners. As a result, Valuetronics’ share price fell 18% on April 26. 
  • We estimate a 10% reduction in FY19E IOT bulb sales would reduce EPS by only 1.6%. 
  • In the absence of management input amid the pre-results black-out period, we have an insufficient basis to adjust our forecasts. We continue to like Valuetronics for its secular growth prospects in home IOT and auto-connectivity. 
  • Maintain BUY with unchanged Target Price of SGD1.25.



Lighting customer faces inventory gestation issues

  • The Dutch lighting customer’s “Home” revenue, where the IOT bulbs are recognised, suffered a 6% y-o-y reduction in sales on a comparable basis in 1Q18. This was due to an inventory build-up at its trading partners during 4Q17, as sales were lower than expected. This had a knock-on effect to the customer’s 1Q18 sales. 
  • The customer expects this issue to linger until 2Q18, before a strong recovery commences in 2H18.


Forecasts unchanged pending details after earnings black-out

  • We expect the Dutch lighting customer to contribute around 31% of revenue by FY19E. On a pro forma basis, assuming this event has a 10% impact to Valuetronics’ IOT lighting sales, we estimate a mere 1.6% negative EPS impact, as this is a lower-margin product. 
  • While Valuetronics is sanguine on the multi-year prospects of IOT bulbs, it has warned investors that volumes shipped are dependent on the customer’s product and marketing plans. Our forecasts are unchanged until further details emerge after the end of the earnings black-out. 
  • Key factors to glean are the impacts throughout the supply chain, and to what degree Valuetronics’ sales volumes will be affected by this episode.


Valuetronics beneficiary of twin secular growth trends

  • We maintain the view that Valuetronics is a beneficiary of emerging demand for home IOT and car connectivity from its smart-lighting and automotive customers; these customers are leaders in markets that are on the cusp of a take-off, and Valuetronics could be a beneficiary. 
  • Our ROE-g/COE-g Target Price is based on 2.8x FY19E P/B (avg. adjusted ROE-: 24.6%, LTG: 2%).


Swing Factors


Upside

  • Better-than-expected growth of IOT bulbs and in-car connectivity modules.
  • New customer acquisitions in ICE.
  • Operating leverage from increased production.

Downside

  • Weaker-than-expected end-demand for products that are customer or industry specific, as well as driven by economic factors.
  • Cost increases for labour and materials.
  • Unforeseen pricing erosion for key products.





Lai Gene Lih Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-27
SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250



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