Small Mid Cap Highlights - UOB Kay Hian 2019-01-09: Takeover Could Drive Re-rating Of Deep-Value Small-Cap Manufacturing Stocks

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FU YU CORPORATION LTD (SGX:F13) VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Small Mid Cap Highlights - Takeover Could Drive Re-rating Of Deep-Value Small-Cap Manufacturing Stocks

• The takeover offer of PCI Limited on 4 Jan 19 at an attractive premium and TTM EV/EBITDA of 5.5x could lead to a re-rating of deep-value manufacturing stocks.
• We re-iterate BUY on deep-value manufacturing names trading at below-industry EV/EBITDA backed by high cash balances and stocks offering high dividend yields.
• Our top picks are Fu Yu (2019F EV/EBITDA of 2.9x and yield of 8.7%) and Valuetronics (2019F EV/EBITDA of 2.7x and yield of 6.3%). Assuming 5.5x EV/EBITDA, both stocks could offer about 80% upside.

WHAT’S NEW

PCI received a takeover offer from Platinum on 4 Jan 19.

• On 4 Jan 19, PCI LIMITED (SGX:P19) announced that it had received a takeover offer from Platinum at an offer price of S$1.33 per share, a premium of 60.1% over the volume weighted average price of the shares for the 12-month period up to the last undisturbed trading day of 17 Sep 18.
• The valuation metrics of 5.5x TTM EV/EBITDA based on the offer price appears to be 19.6% higher than small-cap manufacturing peers’ 4.6x 2018F.

STOCK IMPACT

Deep-value small-cap manufacturing stocks re-rated on the news.

• After the announcement of this deal, we note that several small cap manufacturing names re-rated upward on 7 Jan 18:
  1. FU YU CORPORATION LTD (SGX:F13) (+2.7%),
  2. VALUETRONICS HOLDINGS LIMITED (SGX:BN2) (+2.2%),
  3. SUNNINGDALE TECH LTD (SGX:BHQ) (+2.8%),
  4. MEMTECH INTERNATIONAL LTD (SGX:BOL) (+4.6%), and
  5. HI-P INTERNATIONAL LIMITED (SGX:H17) (+12.2%).
• We think that the deal could serve as a reminder of good value in Singapore’s small-cap manufacturing space.

High margin of safety provides more room for further re-rating.

• We believe deep-value names with a high margin of safety have room for further re-rating, especially in the current uncertain macroeconomic environment which faces risks of trade war and slower growth. Companies with high cash reserve and dividend yield can weather any downturn better than their peers.

Our top picks are Fu Yu and Valuetronics.

• Fu Yu and Valuetronics are the only BUYs among small-cap manufacturing companies under our coverage. Their valuations remain attractive and investors could receive generous dividend yield while waiting for any catalysts, including takeovers, cost rationalisation and huge order wins:
  • Fu Yu trades at at 2.9x 2019F EV/EBITDA and 2019F ex-cash PE of 6.0x. Its net cash has continued to increase to S$75.3, or 52% of its market cap. Fu Yu is diversifying to a more stable business model and is optimising as well as turning around its loss-making operations.
  • Valuetronics trades at 2.7x 2019F EV/EBITDA and 2019F ex-cash PE of 4.0x. Its net cash has continued to increase to S$152.7m, or 51% of its market cap. Valuetronics continues to see good demand for connectivity modules used in the automobile industry.

EARNINGS REVISION/RISK

We maintain our EPS forecasts.

• Risks include forex, lower-than expected orders, and margin pressure from rising costs.

VALUATION/RECOMMENDATION

• We maintain BUY and target prices for Fu Yu and Valuetronics.
• Our S$0.27 target price of Fu Yu is based on 5.3x 2019F EV/EBITDA, pegged to peers’ average.
• Our S$0.87 target price of Valuetronics is pegged to peers’ average of 10.9x 2019F PE.

SHARE PRICE CATALYST

• Additional customers or better cost savings.
• Higher-than-expected dividends.
• Potential takeover offer.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-01-09

SGX Stock Analyst Report BUY MAINTAIN BUY 0.270 SAME 0.270

BUY MAINTAIN BUY 0.870 SAME 0.870