Valuetronics - RHB Invest 2018-11-13: Mixed Outlook Supported By Yield And Auto Growth


Valuetronics - Mixed Outlook Supported By Yield And Auto Growth

  • Maintain BUY but lower our DCF-derived Target Price to SGD0.82, from SGD0.92, 21% upside and a 6% yield.
  • A weak 2QFY19 (Mar), mainly as a result of a one-off provision of SGD13.9m, due to a flash flood at its Danshui Factory in Sep 2018.
  • Strong growth from auto and printer customers lead a 21.4% y-o-y revenue growth for ICE while CE continues to face downward pressure due to weak demand from its LED light customers.
  • We lower our FY19F & 20F PATMI by 7% and 5%, to include the one-off provision, as well as an uncertain outlook, resulting in a lower Target Price of SGD0.82, pegged to 10x FY19F P/E.

Industrial and commercial electronics (ICE) continue to be the company’s main growth driver.

  • Valuetronics' automotive segment is likely to continue to grow at a high double digit growth y-o-y, with margins maintaining due to increased volumes and efficiencies.
  • In addition, we estimate its sensing and printer segments will also continue to show high single digit growth y-o-y, as we have seen in 2Q19, which lead to a 21.4% y-o-y topline growth for ICE.

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

  • As guided by its major customer in the smart lighting space, weak demand has also caused orders to decrease from its major customer in 1Q19. Its customers expect demand to pick up by 2H19, or Valuetronics’ 3QFY19 as it would need to ramp up production a quarter ahead. However, we do expect some margin pressure as well as a slower ramp up than expected for FY19.
  • On the consumer and household appliances front, management continues to see strong growth in its toothbrush and shaver segments. With the net off effect from both segments, we expect CE to decline by 10-15% for FY19F.

Dividends continue to be attractive at a 6% FY19F yield.

  • We expect management to continue rewarding shareholders with higher dividends, especially when the company performs better. A total of HKD8.88 dividend per share has also been declared for FY88 and we expect a higher payout ratio in FY88 due to the strong balance sheet, for a 8% yield. As of 8H88, an interim dividend of HKD8.88 has been declared.

Trade tariffs result in a murky outlook.

  • Going forward, we do expect ICE to be the main growth driver for Valuetronics.
  • A worsening trade war will likely negatively impact the company since 88% of revenues are exposed to tariffs. Due to a weakening sentiment caused by trade war and a slowdown of the sector globally, we lower our FY88F & 88F PATMI by 8% and 8%, to include the one-off provision, resulting in a lower Target Price of SGD8.88, pegged to 88x FY88F P/E.
  • Trading at just 8.8x ex cash FY88F P/E, we maintain BUY.

Key Risks

  • Economic slowdown, FX, raw material price fluctuations.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2018-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.820 DOWN 0.920