Excerpts from analyst's report
CIMB analysts: Ngoh Yi Sin & William Tng, CFA
|■ HK-based electronics manufacturing services (EMS) provider with strong design and development capabilities. 60/40 sales split between ICE and CE segments.
■ Double-digit growth from ICE to offset declining CE sales, boosted by new automotive customer.
■ We estimate FY16 EPS to fall 26.3%, but recover 12-16% p.a. in FY17 and FY18.
■ Strong balance sheet, attractive FY16-18 dividend yields of 6.6-8.3%.
■ Initiate coverage with ADD and target price of S$0.56, based on 8.4x CY17 P/E.
Integrated EMS provider
VALUE is an EMS provider with key businesses in consumer electronics (CE), and industrial and commercial electronics (ICE). Its key strengths lie in its integrated EMS offerings, as well as proactive collaborations with customers on intellectual property (IP) development, enabling it to build sticky customer relationships. VALUE also has a wide product portfolio and net margins of 5-6%. Its customers consist of US and European MNCs.
Exit from mass-market
LED lighting is positive for CE segment We think the steep fall in 9M16 revenue following VALUE’s exit from the highly competitive, less profitable mass-market LED segment, has been priced in. Over 90% of these lighting reached the end of their lifecycle by 3QFY3/16, which should offer some relief to margins as we estimate FY15 gross margin of 13.6% to improve to 15.2% in FY16. Sales of the remaining lifestyle products are expected to rise steadily at 3-4% in FY17-18
Expect EPS to dip in FY16, but relying on stronger ICE growth
While we factor in a 26.3% drop in FY16 EPS, we expect the ICE segment to fill the gap of diminishing CE sales, with increasing orders from both new and existing customers. Through one of the three recently-acquired customers which supplies media connectivity modules, VALUE is able to expand into the automotive sector, with potential for greater growth when it gets qualified by other OEMs.
|Initiate with Add rating and TP of S$0.56
We initiate coverage of VALUE with Add and target price of S$0.56, based on 8.4x CY17 P/E that is at 10% discount to industry average of 9.4x, considering its smaller scale. We like the company for its strong earnings delivery, compelling valuations of 6.4x CY17 P/E (1.8x ex-cash CY17 P/E), cash-generative business and strong balance sheet. A potential catalyst is faster-than-expected client acquisition, while key risks are severe economic downturn and higher-than-expected hike in labour costs in China.
-- Ngoh Yi Sin (photo)
The change in sales mix (more ICE vs. CE) also contributes to better margins. We project FY17-18 EPS growth at 12-16% p.a.
Attractive dividend yields, zero debt
VALUE has a track record of paying dividends (payout ratio of 45% for the past five years on average), making it an attractive dividend play.
With a dividend policy of 30- 50% payout ratio, we forecast FY16-18 dividend yield of 6.6-8.3%. It also has a net cash/share of S$0.32 (at over 70% of market cap) as of 9MFY3/16; this war chest equips VALUE to tide over tough times and pursue M&A opportunities.