ThanhHangTruong7.15Maybank Kim Eng analyst Truong Thanh Hang (left) issued a 'sell' call on Valuetronics yesterday (See: VALUETRONICS: "Losing The Light; Initiate With SELL," Says Maybank). That was among her first reports as an analyst in Singapore, as far as we know. Today, in a not-often-seen type of rejoinder, analysts from DBS Vickers and Lim & Tan Securities say why they disagree with the Maybank report.

value_sellchart10.14At the current share price, 62.5% of Valuetronics’ market cap is cash.
Chart: Yahoo Finance.

Lim & Tan Securities: " Zero value accorded to lighting division a bit overly-pessimistic by Maybank KE"

Valuetronics (32 cents, down 6 cents) fell 6 cents or 16% yesterday on 
26.3mln shares traded on the back of a “Sell” report by Maybank KE issued yesterday. (The broker’s target price was 25 cents).

Maybank KE’s concerns are not new, having been raised by us in Sept’14 when we downgraded our call on the stock to HOLD. Specifically, it is about the re-structuring of one of their major consumer electronics customer as a result of the weakness suffered by their lighting division. This in turn is caused by intense competitive pressures from lower cost producers in China. 

While the above may be true and was the reason for the lower than expected performance in 1Q ended June’14, we find the “zero value” being accorded to this division a bit overly-pessimistic by Maybank KE given that Valuetronics’ management has always focused on bottom-line more than top-line and if this division were to indeed by loss making, they would not continue doing it.
And given that they have foreseen this happening some-time ago, Valuetronics’ management has already targeted the ICE business which focuses more on industrial and commercial products to help mitigate the slowdown in the consumer electronics business. The ICE business is also contributing close to 40% of profi t from nothing a few years ago when they first started. 

Given that the ICE business is a higher margin business compared to the consumer electronics business, we believe the ICE business will be able to help mitigate the slowdown from the consumer business and on a net basis should allow the company to report flattish performance.

With the sharp sell-down in share price, Valuetronics’ current market cap of $120mln is 60% backed by its net cash position of S$72mln. Trailing PE is 4.8x while EV/EBITDA is only 1.2x. If it slashes dividends by 40% this year (which is extreme), its forward yield would still be an attractive 6+%. (Forward yield is 10% if it maintains it at 3.2 cents a share).

We would look to Accumulate on further weakness (if it goes to 30 cents or below), up from HOLD previously.

DBS Vickers: "Lighting concerns overblown"

 Tan Ai Teng (left)

Lighting restructuring.Our call with management indicates that business is as usual for now. The customer’s restructuring would take time and the form of the separated entity is still unknown. Unless the restructuring involves a sale to a competitor who may terminate the entire business line or related supply chain, we believe existing vendors would have time to adjust. As uncertainty could affect business to Valuetronics (VALUE), we have cut FY15F earnings by 20% to err on the side of conservatism. 

Bulk of earnings are non-Lighting, hence impact on group earnings may not be very material.Lighting accounts for c.25% of group profits. A total loss of this business would cause overall profits to decline but VALUE is unlikely to sink into losses or see a sharp earnings decline because Industrials, which accounts for c.60% of earnings, continues to grow with more accounts in the pipeline. The remaining 15% of earnings is from the relatively stable PCBA business. Moreover, VALUE is always cultivating new customers, which should help to partly offset any potential decline in Lighting business.

More conservative TP of S$0.41 still offers 28% upside. Assuming Lighting earnings were to decline 20% due to the current uncertainty, we would derive a TP of S$0.54 if we pegged Lighting to a trough multiple of 2.5x PE while other stable and growing businesses are pegged to 10x PE, which is in line with peers. Assuming Lighting incurs losses, TP would be S$0.41, pegging P/BV to its historical mean multiple of 1.14x.

Taking the lower of the two fair values, S$0.41 TP still offers 28% upside with 6.6% dividend yield. At the current share price, 62.5% of VALUE’s market cap is cash. Hence, maintain Buy call for investors with good risk appetite and longer investment horizon. 

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