Valuetronics - UOB Kay Hian 2018-11-13: 2QFY19 Robust Results Masked By One-Off Flood Provision

VALUETRONICS HOLDINGS LIMITED (SGX:BN2) | SGinvestors.io VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - 2QFY19: Robust Results Masked By One-Off Flood Provision

  • Valuetronics’ 2QFY19 net profit declined 13% y-o-y due to a one-off flood provision. Excluding that, net profit would have increased 14% y-o-y.
  • Growth momentum of the ICE segment remains robust at 21% y-o-y, while that of the CE segment fell 22% y-o-y due to a temporary disruption from flood.
  • We cut our FY19/20 EPS by 5%/2% to include provision from flood, and reduce our target price from S$0.96 to S$0.87, pegged to peers’ average of 10.9x PE for FY19.
  • Business outlook remains positive. Maintain BUY.



2QFY19 RESULTS


ICE segment maintained robust growth, offsetting the soft CE segment.

  • Valuetronics’ (VALUE) 2QFY19 core net profit was a slight miss, due to softness in the consumer electronics (CE) segment on the back of lower demand for smart lighting and temporary production disruptions of Danshui’s factory due to a flood.
  • Revenue for the CE segment fell 22.0% y-o-y.
  • On the other hand, revenue for the industrial and commercial electronics (ICE) segment grew 21.4% y-o-y due to better demand for connectivity modules used in the automobile industry and printer business.

Managing potential issues from trade war.

  • Valuetronics updated that roughly 20% of its revenue could potentially be impacted by trade war after more customers approached Valuetronics for discussion and financial assistance. This is up from the 10% estimation previously. Despite this, Valuetronics remains confident that the final impact to its business will be limited as:
    1. it provides delivery to its customers on a freight on board (FOB) basis, where it is responsible for delivering goods up to the port of departure,
    2. it has several mitigation plans such as passing on some production process to business associates located outside of China, and
    3. it only provides negligible financial assistance to the affected customers.

Supply chain challenges easing.

  • Valuetronics is starting to see some relief in the supply chain challenges with the normalisation of lead times and stabilisation of prices in passive electronic components (including resistors, transistors, capacitors, etc).


STOCK IMPACT


Outlook remains positive.

  • Valuetronics remains positive on its business outlook, especially for the higher-margin ICE segment as it continues to see more traction from the automobile customers.

Increasing cash hoard.

  • Net cash increased to HK$888.8m, or S$888.8m. This is equivalent to 88.8% of its market cap and provides a good warchest for expansion.


EARNINGS REVISION/RISK

  • We reduce our FY88-88 net profit forecasts to HK$888.8m (-8.8%), HK$888.8m (-8.8%) and HK$888.8m (-8.8%) respectively.
  • Key risks include higher-than-expected loss of businesses from trade war and forex fluctuation from strengthening of the renminbi.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our PE-based target price is reduced from S$8.88 to S$8.88, pegged to peers’ average of 88.8x PE for FY88.


SHARE PRICE CATALYST

  • Additional customers in the IoT and automobile space.
  • Higher-than-expected dividends.
  • Potential M&As.





John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.87 DOWN 0.960



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