Valuetronics Holdings Ltd - CGS-CIMB Research 2018-08-14: 1QFY3/19 Light At The End Of Tunnel

Valuetronics Holdings Ltd - CGS-CIMB Research 2018-08-14: 1qfy3/19 Light At The End Of Tunnel VALUETRONICS HOLDINGS LIMITED SGX:BN2

Valuetronics Holdings Ltd - 1QFY3/19 Light At The End Of Tunnel

  • Valuetronics’ 1Q19 core net profit of HK$49m met our/consensus expectations. Maintain ADD; stock offers attractive 7.5% dividend yield and trades at 6.2x forward P/E (3x ex-cash).
  • We think worst could be over for smart lighting sales as inventory level normalises.
  • 1Q19 topline held steady y-o-y, led by double-digit growth from auto modules and strong demand for consumer lifestyle products.

1Q19 in line; the worst could be over for smart lighting sales

  • Valuetronics reported 1Q19 core net profit of HK$49m (-1.8% y-o-y, +12.2% q-o-q), deemed in line at 23% of our/consensus full-year numbers as we expect sales recovery of consumer electronics (CE) in coming quarters.
  • Valuetronics’ topline improved 1.2% y-o-y and 9.3% q-o-q as industrial & commercial electronics (ICE) sales grew 15.2% y-o-y to offset the 15.6% decline in CE.
  • Gross margin (GPM) was lower at 14.6% (1Q18: 15.0%, 4Q18: 14.2%) as a result of product mix changes, but net margin was largely stable at 7%, thanks to higher interest income and net exchange gains.

~ ~ Where SG investors share

Updates on key product drivers

  • Valuetronics recorded higher volume for connectivity modules in 1QFY19, on the back of a new series rolled out by its first auto OEM, with some new contribution from its 2nd auto car brand. There was also higher sales contribution from its printer customers due to organic growth.
  • For smart lighting, we saw the bulk of inventory destocking impact this quarter as sales contribution fell below 10%. With inventory level normalising to 8-10 weeks at trade partners of Valuetronics’ key customer (previously 9-18 weeks), we expect q-o-q sales recovery as the Dutch MNC introduces new applications, deepens penetration in new markets and intensifies marketing activities.
  • Consumer lifestyle revenue grew at double-digit rate, underpinned by added Internet of Things (IoT) features for toothbrushes and more printed circuit board assembly (PCBA) production for other home devices.

On supply chain and trade war

  • Supply of critical components remains tight and is increasingly becoming an industry- wide issue, though pricing pressure on selected parts is now less severe, according to management.
  • On trade war concerns, less than 2% of its sales fall within the current tariff list. In the worst case scenario, an estimated 50% of total revenue could be affected as these products are eventually shipped to the US.

Maintain Add, with attractive yield and undemanding valuation

  • Valuetronics’ 1Q19 operating cashflow strengthens to HK$88.5m from 1Q18’s HK$22.9m, and the company remains in a net cash position (no debt, accounting for c.50% of market cap).
  • Valuetronics currently trades at 6.2x forward P/E (3.0x ex-cash), and offers dividend yield of 7.5%. We maintain our ADD call on the stock with unchanged FY19-21F EPS forecasts and Target Price of S$0.95, still pegged to 10x CY19F P/E (industry average).
  • Key downside risks include escalating trade tensions, supply chain issues, and any order delay/cancellation.
  • We think stronger recovery of smart lighting sales and new customer wins could catalyse the stock.

NGOH Yi Sin CGS-CIMB Research | William TNG CFA CGS-CIMB Research | 2018-08-14
SGX Stock Analyst Report ADD Maintain ADD 0.950 Same 0.950