Valuetronics - UOB Kay Hian 2019-02-14: 3QFY19 Robust ICE Growth Held The Fort; Expect Softer FY20

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

Valuetronics - 3QFY19: Robust ICE Growth Held The Fort; Expect Softer FY20

  • Valuetronics’ 3QFY19 net profit increased 2.6% y-o-y as the growth of the higher-margin ICE segment offset the decline in the CE segment. 9MFY19 net profit was in line, at 75.5% of our full-year estimate.
  • Revenue growth momentum of the ICE segment remained robust at 12% y-o-y, while that of the CE segment fell 26% y-o-y.
  • We cut our FY20F and FY21F EPS by 9% and 13% to account for a weaker CE segment and flattish performance from the ICE segment.
  • Maintain BUY. Target price: S$0.87.



3QFY19 RESULTS


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

  • VALUETRONICS HOLDINGS LIMITED (SGX:BN2)'s 3QFY19 core net profit was in line, while the consumer electronics (CE) segment’s performance was weaker-than-expected due to lower demand for smart lighting. Revenue for the CE segment fell 26% y-o-y.
  • On the other hand, revenue for the industrial and commercial electronics (ICE) segment grew 12% y-o-y due to better demand for connectivity modules used in the automobile industry and printer business.

Expect softer performance from the CE segment in the near term and slower growth for ICE.

  • Management expects the performance of the CE segment to remain soft for the near term. In addition, we think that growth of the ICE segment could be limited due to the potential absence of new projects from the printing segment. Therefore, the role of the higher-margin ICE segment is becoming more significant.
  • We estimate the ICE segment’s contribution has increased to 75% of total profit in 3QFY19, up from 51% in FY18.

Exploring options to diversify manufacturing footprint.

  • To mitigate the potential impact of the uncertainties brought about continued trade tensions, Valuetronics is exploring options to diversify its manufacturing footprint into North America and the Southeast Asian countries.
  • We believe any synergistic and EPS accretive acquisitions could re-rate the stock. In addition, Valuetronics has a huge war chest of HK$816m (S$142m), equivalent to 47% of its market cap.


STOCK IMPACT


Outlook for ICE is neutral.

  • Valuetronics is neutral towards its ICE segment. It continues to see more traction from the automobile customers but the printer customer could face more lumpy earnings depending on the contract wins from its customers.

Expect slower demand for CE.

  • On the other hand, Valuetronics expects the demand for smart lighting products to continue to weaken in the near term.

Increasing cash hoard.

  • Valuetronics has a huge war chest of HK$816m (S$142m), equivalent to 47% of its market cap and proving good for expansion.


EARNINGS REVISION/RISK

  • We reduce our FY18-20 net profit forecasts to HK$202.4m (-0.5%), HK$202.2m (-9.5%) and HK$206.2m (-14.0%) respectively.
  • Key risks include higher-than-expected loss of business due to the trade war and higher-than-expected decline in the CE and ICE segments.


VALUATION/RECOMMENDATION

  • Maintain BUY and PE-based target price of S$0.87, pegged to peers’ average of 11x PE for FY20.


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/ 2019-02-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.870 SAME 0.870



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