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Valuetronics (VALUE SP) Summary

Core Content

Valuetronics (VALUE SP) is a Singapore-based technology company with a market capitalization of USD 122M and an average daily trading volume (ADTV) of USD 0.5M. The company has been upgraded from SELL to BUY with a new target price of SGD0.62, representing a 41% increase from the previous target of SGD0.25. The current share price is SGD0.44, and the company is valued at 9.1x FY17 PER.

Main Points

• Business Segments: Valuetronics operates in two main segments: Consumer Electronics and Industrial. The Consumer Electronics segment is currently the largest contributor to revenue, while the Industrial segment is growing and expected to make up a significant portion of the company's earnings in the future.

• LED Segment: The LED lighting business has been a significant contributor to revenue and operating profit in the past, but it is now shrinking in importance. LED revenue declined by 21% YoY in FY3/15, contributing 30% to total revenue and 49% to Consumer Electronics revenue. Its contribution to operating profit is only 10%, due to low margins of 2.3%. The LED segment is expected to continue declining by 10-15% YoY in FY3/16-18, although the broader LED industry is growing.

• Industrial Growth: The Industrial segment is expected to grow at a slower pace in FY3/16-18, with a forecast of 12% YoY growth. It contributed 52% to total revenue in FY3/15 and is expected to increase to 50.6% by FY3/18. Industrial revenue growth has slowed from 23% in the previous year to 12% as two major customers completed their production migration to Valuetronics.

• Customer Diversification: Valuetronics is actively seeking new customers in both segments. It is selective and aims to become a strategic supplier to its clients. The company is confident of acquiring new customers, especially in the Consumer Electronics segment, which is currently dominated by its Dutch customer (accounting for ~90% of Consumer revenue).

• Earnings Forecast: The company has raised its FY3/16-17 EPS forecast by 5-11%. Net dividend yields are expected to remain high at 7-8% in FY3/16-18. Free cash flow is expected to remain positive, supporting a payout ratio of 50% and dividend yields of 7-8%.

• Valuation: Valuetronics is currently valued at 9.1x FY17 PER. The company's valuation is benchmarked against contract manufacturers, with a 35% discount to peers due to the drag from the LED segment and slower growth. The company has a large cash reserve of HKD478m, which is added back to its valuation.

• Key Metrics:

  • Revenue: Expected to grow from HKD2,433.3m in FY14A to HKD2,654.5m in FY18E.
  • EBITDA: Projected to increase from HKD207.3m to HKD241.3m.
  • Net Profit: Forecasted to rise from HKD147.9m to HKD162.9m.
  • EPS: Raised to HKD0.40-0.41 for FY3/16-17.
  • Dividend Yield: Expected to remain strong at 7-8%.
  • Free Cash Flow Yield: Estimated at 30.7% in FY14A, decreasing to 7.6% in FY16E, but increasing to 22.6% in FY18E.

Key Information

• Share Price Performance: Valuetronics has had a negative absolute return of -10.2% in the last month, but it has outperformed the market by 9.4%.

• Dividend Payout: Net DPS (dividends per share) is expected to increase from HKD0.20 in FY14A to HKD0.22 in FY18E.

• P/E and P/BV: The company's P/E is around 6.3x, and P/BV is 1.3x, with a declining trend over time.

• Peer Comparison: Valuetronics is compared to peers such as CDW Holding, Interplex Holdings, and Fu Yu Corp. It has the lowest three-year EPS growth among them, at 2.8%, compared to CDW's 10.1%.

• Catalysts for Upgrade: The company is expected to benefit from a stronger order book, new customer acquisitions, and improved operating performance.

Summary Table

Conclusion

Valuetronics is undergoing a transformation, with the LED segment shrinking in importance and the Industrial segment gaining traction. The company's upgrade to BUY reflects optimism about its future performance, driven by new customer acquisition and the expected growth of the Industrial segment. Despite the challenges from the LED segment, the company's strong cash reserves and consistent dividend yields support its valuation.