Excerpts from analyst's report
KGI Fraser analyst: Renfred Tay
Net cash + bond holdings at about 37c per share!
Consumer Electronics (CE) close to bottom.
Valuetronics' sales mix continued to shift towards the much higher margin ICE segment. Photo: CompanyVALUE’s 9MFY16 results remained below our forecasts as we did not adjust them previously (we preferred to see 3QFY16 numbers before making adjustments). Its revenue of HK$1,511m (‐18% yoy) and net profit of HK$90.9m (‐17% yoy) for 9MFY16 formed 64% and 59% of our previous FY16F estimates, respectively. Such a decline in revenue was expected as we mentioned in our previous update that the production of mass market LED lights should cease completely in 3QFY16.
Even though VALUE’s results look weaker yoy, it should not have surprised investors as the company had pre‐empted the trend that we are seeing now. We believe VALUE’s CE revenue should have bottomed out. The industrial and commercial electronics (ICE) segment (+21% in revenue) continued to grow more strongly than our previous estimate due mainly to contributions from its new customer in the automotive industry (as highlighted previously). VALUE’s gross margin for 3QFY16 grew qoq to 16.2% from 14.6% as sales mix continued to shift towards the much higher margin ICE segment.
Investment thesis intact.
Analyst Renfred TayWe continue to believe that growth in the ICE segment (higher gross margin than CE), should in time, boost VALUE’s profitability, restart growth, and lower its customer concentration risk. VALUE’s CE/ICE split is now 32%/68%, versus 1QFY13’s split of 76%/24%. A turnaround should ensue after the seasonally weaker 4Q16.
Cash flows remain very strong; very attractive and sustainable dividends.
Operating and free cash flow generation remained strong during 9MFY16 at HK$285m and HK$263, respectively. Dividends continue to look very attractive at ~8%. In spite of the decline in net profits, VALUE should not have any difficulty with at least maintaining dividends with its big cash balance (incl. AFS financial assets) of HK$768m (~S$0.37 per share), strong cash flows, modest capex and no debt.
No brainer BUY.
VALUE currently trades at 6.3x FY17F P/E (1.0x ex‐cash), on our new set of forecasts. About S$0.37 of its stock price of S$0.385 comprises of its cash and bonds. We value the stock at 9x FY17F P/E or TP of S$0.56 (previously DCF‐based; equivalent to 9x FY16F P/E). The market also seemed to have forgotten that HKD had appreciated ~6% ytd against SGD when pricing VALUE’s stock, which is almost unchanged from a year ago.