Valuetronics Holdings Ltd - CGS-CIMB Research 2018-05-28: 4QFY18 Medium Term Prospects Intact

Valuetronics Holdings Ltd - CGS-CIMB 2018-05-28: 4QFY18 Medium Term Prospects Intact VALUETRONICS HOLDINGS LIMITED SGX: BN2

Valuetronics Holdings Ltd - 4QFY18 Medium Term Prospects Intact

  • Flattish sales in 4Q18 (+1.2% y-o-y) is a result of seasonality weakness, possible inventory reduction from smart lighting and limited supply of critical components.
  • Valuetronics' FY3/18 core net profit grew 33% y-o-y, within our and consensus expectations.
  • We expect the lack of order visibility for wireless lighting to pose near-term uncertainty on the stock; consumer lifestyles products are poised for strong growth trajectory.
  • We remain positive on its auto segment, given the product launches and a 2nd OEM customer.
  • Other results highlights include OPM improvement and higher DPS. Maintain ADD.

Explaining 4Q18 sales weakness

  • Valuetronics reported FY3/18 core net profit of HK$201m (+33% y-o-y), on the back of higher sales from consumer electronics (CE, +42% y-o-y) and industrial & commercial electronics (ICE, +13% y-o-y). This formed 97%/99% of our/Bloomberg consensus forecasts. 4QFY18 core net profit only grew 7.1% y-o-y.
  • Apart from seasonality weakness (timing of Chinese New Year affected labour issues), inventory reduction of smart lighting products and shortage of critical component also contributed to slower CE and ICE sales, respectively.

Mixed outlook for consumer electronics (CE)

  • Consumer lifestyles products, particularly electric toothbrushes, were one of its key outperformers in FY18, posting double-digit growth, thanks to the success of new products with Bluetooth function.
  • We expect increasing product penetration and market depth to underpin such sales momentum into FY19F, thereby offsetting possible revenue decline from wireless lighting, which could undergo some destocking over 1-2 quarters. 
  • The short order visibility for smart lighting (2-3 weeks) could pose near-term uncertainty.

Auto outlook still robust

  • We project the ICE segment to deliver another year of double-digit topline growth in FY19F, led by increasing sales from printers and automotive connectivity modules. The auto segment could see higher revenue from new product launches and ramp-up of sales to its 2nd OEM customer.
  • Management continues to pursue opportunities with both new and existing customers, which could contribute more meaningfully in the medium term.

OPM expansion thanks to higher operating leverage

  • Despite product mix changes (CE/ICE mix was 49%/51% in FY18 vs. 43%/57% in FY17) resulting in lower gross margin, Valuetronics added 0.5% pts to its operating margin. Operating cash flow was lower at HK$64m (FY17: HK$161m) due to faster payables turnover, which coupled with higher dividend payout, led to a reduced cash position (zero debt) as of end-FY18.
  • The stock currently trades at 9.5x 12M forward P/E (6.0x ex-cash).

Higher FY18 DPS; maintain ADD

  • Valuetronics declared a final and special DPS of HK$0.20, bringing full-year DPS to HK$0.27 (vs. FY17: HK$0.20), which translates into 56% payout ratio and 5.6% dividend yield. 
  • We cut our FY19-20F EPS by 4.2-8.4% on lower sales assumptions, and our target price falls to S$0.95, now pegged to 10x CY19F P/E (prev. 11x), on par with industry average.
  • Maintain ADD.
  • Downside risks are unexpected order delays or cancellations; while faster sales normalisation of smart lighting or new customer wins could catalyse the stock.

NGOH Yi Sin CGS-CIMB | 2018-05-28
SGX Stock Analyst Report ADD Maintain ADD 0.95 Down 1.100