Valuetronics - Maybank Kim Eng 2018-05-29: Prospects Remain Bright, But Slightly Dimmed

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VALUETRONICS HOLDINGS LIMITED SGX: BN2

Valuetronics - Prospects Remain Bright, But Slightly Dimmed

Target Price - 8% to factor slightly lower growth expectation

• Valuetronics’ 4QFY18 net profit grew only 8% y-o-y due to inventory issues at its smart-lighting customer’s trading partners and the effects of a late Lunar New Year in 4QFY18. While net profit was broadly in line with our and consensus estimates, we trim FY19-21E EPS by 5-10% to factor in short-term volume weakness and a slightly lower FY20-21E growth outlook.
• We believe Valuetronics’ growth drivers are broadly intact and maintain BUY with ROE-g/COE-g Target Price of SGD1.15 based on 2.5x P/B (FY19-21E avg. adj. ROE: 23% and LTG: 2%) from 2.8x previously due to a lower ROE.
• Good dividend yield (6-8% FY19-21E) provides Valuetronics share-price support.

Smart-lighting structural story intact

• Valuetronics’ smart-lighting customer remains confident of the structural prospects of its market-leading products. While 2QCY18 should still be weak, the customer is targeting double-digit growth in 2HCY18 and in the coming years to make an acceptable ROI and meet expected end use demand growth.
• Valuetronics could benefit from the new releases that this customer is planning, given their strong and longstanding relationship.

Other products are also experiencing growth

• Valuetronics expects double-digit revenue growth from its auto customer to continue into FY19E (17% of sales), driven by organic expansion of the current end-customer and contributions from a new end-customer. 
• The printed circuit board assembly (PCBA) business (c25-30% of sales) should also enjoy firm growth in FY19E as Valuetronics’ consumer lifestyle customer’s products has been gaining traction across several markets.

Outlook and mitigation plans

• Broadly speaking, business continues apace for Valuetronics’ customers, despite macroeconomic uncertainties. Extended procurement lead times for various components are expected to persist into FY19E, and Valuetronics notes that customers are warming up to the idea of building safety stock to ensure desirable levels of production can be achieved.

Revisions to estimates

• We cut FY19-21E EPS by 5-10% after adjusting for:
  1. lower FY19E contributions from Valuetronics’ smart-lighting customer as a result of short-term inventory issues and marginally tempered growth expectations for this customer in FY20-21E; and
  2. slightly lowered FY19E gross margin to reflect negative operating leverage from the reduced volume expectation from this customer.
• More specifically, the inventory issues pertain to a smart-lighting inventory build-up at the trading partners of this customer in 4Q17 as a result of overly aggressive growth plans by the customers’ trading partners in the US. Inventory de-stocking led this customer’s “Home” sales (where smart lighting is recognised) to fall 6% y-o-y in 1QCY18. Valuetronics, being an important supplier for this customer’s smart lighting products was also affected.
• Valuetronics has noted the customer’s expectation for a strong recovery in 2HCY18, and remains sanguine about the long term prospects for this product.

Valuetronics’ 4QFY18 results:

• FY18 PATMI of HKD204.7m (+32.9% y-o-y) was in line with our and street forecasts. 4QFY18 revenue rose a mere 1.2% y-o-y due to a combination of:
  1. high-base effects in 4QFY17;
  2. a late Lunar New Year in 4QFY18, which reduced response time; and
  3. tepid volumes from its smart-lighting customer as a result of inventory issues at the customer’s trading partners.
• Despite this, strong cost control helped drive the 4QFY18 net profit increase of 7.9% y-o-y.

Three takeaways from this set of results:

• Smart lighting story intact: Valuetronics’ smart-lighting customer remains confident in the structural prospects of its market-leading products. The customer expects sales to normalise in 2HCY18, and targets the business to continue to grow at a double-digit pace in order for it to be profitable given the recent investments made. As Valuetronics has a long and robust relationship with this lighting customer, we believe it can benefit from the new smart-lighting releases by this customer over the medium term. Overall, we factor in flat smart-lighting contributions in FY19E, and expect this project to resume to growth from FY20E onwards.
• Consumer lifestyle, auto and sensors businesses drive FY19-20E growth: Valuetronics remains optimistic towards double-digit revenue growth for its automotive business on the back of organic expansion and the inclusion of a new end-customer. The double-digit growth of its PCBA business in FY18 was a positive surprise to us. This was largely attributed to the customer’s consumer electronics products gaining traction in multiple markets. Management expects this pace of growth to continue in FY19E. Also, contributions from its sensors products business should enjoy growth from new products launched in both FY19 and 20.
• Outlook and mitigation plans: Valuetronics acknowledges the macroeconomic uncertainties, but indicates the outlook among its customers remains largely unchanged. A more pressing issue continues to be the extended procurement lead times, which management expects could persist throughout FY19E. To that end, Valuetronics has noted some customers are warming up to the idea of building safety stock for input components to ensure desirable levels of production can be achieved.

Swing Factors

Upside

• Better-than-expected growth of IOT bulbs and in-car connectivity modules.
• New customer acquisitions in ICE.
• Operatingleverage 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 | https://www.maybank-ke.com.sg/ 2018-05-29

SGX Stock Analyst Report BUY Maintain BUY 1.150 Down 1.250