Valuetronics - RHB Invest 2018-08-14: Still Sound Despite Phillips Issues

Valuetronics - RHB Securities Research 2018-08-14: Still Sound Despite Phillips Issues VALUETRONICS HOLDINGS LIMITED SGX:BN2

Valuetronics - Still Sound Despite Phillips Issues

  • Maintain BUY with unchanged Target Price of SGD0.92, 46% upside, as we came away positive after the analyst briefing with management.
  • The 15.6% y-o-y decline in its CE segment due to a slowdown at its’ major customer, Phillips, was mitigated by a 15.2% increase in its ICE division on higher margins, driven by in-car connectivity modules used in the automotive industry. The CE segment is expected to pick up as its major customer is expecting more product sales following the winding down of inventory by their trade partners to more normalised levels.
  • Valuetronics’ FY19F dividend yield of 7.9% is attractive.

Industrial and commercial electronics (ICE) expected to grow at high single to low double-digit level y-o-y.

  • Valuetronics’ automotive segment is likely to continue growing at high double-digit y-o-y, with margins maintaining due to increased volumes and efficiency. 
  • In 2Q18, ICE grew 15.2% y-o-y mainly driven by in-car connectivity modules used in the automotive industry. In addition, its sensing and printer segments will likely continue to grow at high single-digit y-o-y. 
  • However, its telecoms segment is expected to continue to weaken as its customers are facing lower demand for their products. 
  • All in, we expect the ICE operations to grow at 8-10% y-o-y for FY19F.

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Consumer electronics (CE) facing pressure from smart lighting segment.

  • As guided by its major customer in the smart lighting space, weak demand resulted in lower orders in 1Q19, causing the CE segment to drop by 15.2% y-o-y, with its customers expecting demand to only pick up by 2H19, or Valuetronics’ 2QFY19 and 3QFY19, as it would need to ramp up production a quarter ahead.
  • On the consumer and household appliances front, Valuetronics’ management continues to see strong growth at its toothbrush and shaver segments. With the net-off effect from both segments, we expect CE to still grow between 2-4%.

Dividends continue to be attractive – FY19F yield of 7.9%.

  • We expect management to continue rewarding shareholders with higher dividends, especially when performance improves. A total DPS of HKD0.27 has been declared for FY18, and we expect more dividends to be paid out in FY19F with a higher payout ratio due to its strong balance sheet.
  • We are projecting an attractive FY19F dividend yield of 7.9%.

Fundamentals intact, a buying opportunity.

  • Going forward, we expect growth to continue in FY19 due to healthy growth drivers at its ICE and automotive segments. 
  • We maintain our BUY call as we believe Valuetronics’ fundamentals and growth drivers remain intact, coupled with the attractive FY19F dividend yield of 7.9%.
  • Key risks include economic slowdown, forex risks, and raw material price fluctuations.

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-14
SGX Stock Analyst Report BUY Maintain BUY 0.920 Same 0.920