Valuetronics - UOB Kay Hian 2019-05-31: FY19 Results In Line; Huge War Chest For Expansion

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

Valuetronics - FY19: Results In Line; Huge War Chest For Expansion

  • FY19 results were in line; net profit met 98% and 99% of consensus and our forecasts.
  • VALUETRONICS HOLDINGS LIMITED (SGX:BN2) ended FY19 with a net profit decline of 2.6% y-o-y, mainly due to the weaker CE segment and higher operating expenses that were partially offset by the robust growth in the ICE segment.
  • We cut our FY20 EPS by 11% to account for a weaker CE segment and our target price falls 8% to S$0.80.
  • Good value has emerged as Valuetronics now trades at FY20F ex-cash PE of 3.2x. Maintain BUY.



VALUETRONICS' FY19 RESULTS


Year to 31 Mar (HK$m) FY19 FY18 yoy % chg 4QFY19 4QFY18 yoy % chg
Revenue 2,828.8 2,853.7 -0.9 679.0 644.0 5.4
Gross Profit 430.3 414.6 3.8 104.6 91.7 14.1
Gross Margin (%) 15.2 14.5 0.7 15.4 14.2 1.2
Core Net Profit 199.5 204.7 -2.6 45.8 47.0 -2.5
Core Net Margin (%) 7.1 7.2 -0.1 6.7 7.3 -0.5



Results in line.

  • Valuetronics’ 4QFY19 sales grew 5.4% y-o-y, driven by 9.7% y-o-y growth in the higher-margin industrial and commercial electronics (ICE) segment while net profit fell by a marginal 2.5% y-o-y due to higher selling and administrative expenses.
  • Valuetronics ended FY19 with a net profit decline of 2.6% y-o-y, mainly due to the flash flood impairment of S$13.6m in 2QFY19 and weaker revenue from the consumer electronics (CE) segment (-16.9% y-o-y) which was partially offset by strong revenue growth (+14.6 y-o-y) from the ICE segment that saw better demand from existing printer and automotive customers, as well as new customers featuring IOT products.

One-year stock price correction of 21% and ex-cash PE of 3.2x for FY20F have more than priced in a weaker FY20.

  • We believe our forecast of a 10% decline in EPS for FY20F has sufficiently captured the headwinds Valuetronics is facing. We expect revenue from the CE segment to decline 22% y-o-y, while the ICE segment should remain stable for FY20.
  • More importantly, the balance sheet strength of Valuetronics has improved significantly, with net cash position at HK$992m (S$174m) as of FY19, up from HK$772m in FY18, equivalent to more than 60% of Valuetronics’s market cap. In addition, the ICE segment’s contribution has increased to 59% of total profit in FY19, up from 51% in FY18.

Diversifying manufacturing footprint and exploring M&As.

  • To mitigate the potential impact of the uncertainties brought about by continued trade tensions, Valuetronics has been rolling out initiatives to diversify its manufacturing footprint in Vietnam. Mass production for shipments from Vietnam to the US market will take place once the customer qualifies the initial set-up which is estimated to be by end-Jun 19. Valuetronics believes this could provide a good alternative solution to customers impacted by the trade war.


STOCK IMPACT


Outlook for ICE is neutral.

  • Valuetronics is neutral towards its ICE segment. It expects a stable performance for its automobile and printer customers.

Expect slower demand for CE.

  • On the other hand, Valuetronics expects demand for smart lighting products, which contribute around 10% of FY19 revenue, to continue to weaken in the near term.

Increasing cash hoard.

  • Valuetronics has a huge war chest of HK$992m (S$174m), equivalent to more than 60% of its market cap and could serve as a war chest for expansion.


EARNINGS REVISION/RISK

  • We reduce our FY20-21 net profit forecasts to HK$180.3m (-10.8%) and HK$175.2m (- 15.0%) respectively to account for weaker CE revenue due to the loss of the smart lighting business. On the other hand, the ICE segment is expected to remain stable.
  • 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.

  • We reduce our PE-based target price by 8% from S$0.87 to S$0.80, pegged to peers’ average of 11.0x PE for FY20F.


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/ 2019-05-31
SGX Stock Analyst Report BUY MAINTAIN BUY 0.80 DOWN 0.870



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