Valuetronics

Despite Valuetronic’s weaker 3Q results (9m eps fell 17%), driven by the slump in CE revenue, there are some positives on its performance :-

- CE revenue drop may hit bottom (as they exit the LED lighting business)
- ICE revenue is still growing
- GPM is rising due to change in segment mix in favour of ICE
- FCF for 9m and 3Q rose significantly
- Net cash position rose to sgd 122 million (83% of market capitalisation)

FCF generated in 3Q is stellar, driving the 9M FCF to sgd 12.4 cents per share. To put it in perspective, trailing eps and dps are at 6.9 cents and 3.6 cents respectively.

Given that the share price is currently depressed, it would be logical for management to consider strategic share buyback programme, recent buy-backs are too meager, to raise shareholder value.
Given its strong cash generative business and solid balance sheet, this PLC may be an attractive target for M & A.

Valuetronics bought back 425k shares @ 0.375 today. Academic studies have shown that share buy-backs, by fundamentally strong PLCs, during periods of price weakness will enhance shareholder value in the long run.

Valuetronic CE revenue from Q3 2016 completed all its last order from mass market LED light bulbs. With no more production of mass market LED light bulbs, the CE revenue will now comprise products with consumer for a porfolio of customers.

Valuetronic ICE segmental revenue over the this financial year had been growing by double digit every quarterly. As the company had completed its last order from mass market LED, the last quarter revenue contrbution will come mainly from ICE only. Therfore the coming 4Q profit without contribution from CE segment profit will hit BOTTOM. Valuetronic subsequnce year profit will be back on the UPTREND. This is because of its healthy growth from ICE revenue. The growth in ICE segment will INCREASE ITS GROSS PROFIT MARGIN.

As market does not like uncertainty and since Valuetronic BOTTOM IS IN SIGHT I believe it is good time to accumulate Valuetronic shares given that the share price is currently depressed and trading below 10x PE. This year dividend likely to be about HK 15 cents. (50% paid out yield about 7%)

Given Valuetronic strong cash generative business and solid balance sheet with cash of HK$682 million (S32.5 cents) and debt free its definately a great bargain. Once Valuetronic hit bottom its ICE segment will propel its to next level of growth and next financial year. Blue sky ahead for Valuetronic future business growth.

Since last year analysts had been calling for buy on Valuetronics from 54 cents to 64 cents. (RHB, Maybank Kim Eng, UOB Kay Hian & KGI Fraser) Yet the share price is currently depressed trading at 37.5 cents. Given Valuetronics strong cash generative business and solid balance sheet with cash of HK$682 million (S32.5 cents) and debt free. Valuetronics is definately a great bargain. Dividend last year is HK20 cents and trading below 10x PE. (Ex cash 1.0x PE) Yet why the share price is so depressed?

One main reason is because of its SHRINKING CE segment which worry the market. As the company had exit the CE segment and the healthy growth in the ICE segment will propel the growth of its business. I am now bullish on Valuetronics and I am buying its shares gradually inspite of the volatile stock market condition. My reasons are:

1. The company had exit the CE segment which is the main concern of the market on Valuetronics business. The ICE segment had been growing by double digit. ICE revenue The latest in Q3 result ICE contributed 67.5% of the total revenue.

2. As market does not like uncertainty and since Valuetronics BOTTOM IS IN SIGHT without CE contribution. The sebsequence growth in ICE segment and the improve margin will propel the growth of Valuetronics future business.

3. I am buying at this depressed price few months ahead of its profit turnaround. At this level the down-side is limited. Yield is at least above 7%.

4. Given its strong cash generative business and solid balance sheet, Valuetronics is an attractive target for M & A.

Valuetronic Q4/FY 2016 result will be out on 25th May 2016. Valuetronic ICE segmental revenue over the this financial year had been growing by double digit every quarterly. As the company had completed its last order from mass market LED, the last quarter revenue contrbution will come mainly from ICE only. Therfore the coming 4Q profit without contribution from CE segment profit will be the lowest. Going forward Valuetronic subsequnce year profit will be back on the GROWTH PATH. This is because of its healthy growth from ICE revenue. ICE segment gross profit margin is higher than CE segment. Valuetronic future looks promising.

Given Valuetronic strong cash generative business and solid balance sheet with cash of HK$682 million (S32.5 cents) and debt free. Given its strong cash generative business and solid balance sheet, Valuetronics is an attractive target for M & A.

Valuetronics had completely moved out of the low margin consumer Electronics segment (CE) by Q3 2016. On the other hand ICE segment continued to deliver solid growth in Fy2016. ICE segment had achieve the third consecutive year of double digit growth. FY2016 gross profit margin inproved with increased weightage in ICE segment from 13.6% to 15.25%.

Valuetronics working capital remained healthy with operating activities generated a relatively substantial cash flow of HK$289.3 million for 2016 (FY2015: HK$176.6 million), notwithstanding a decline in revenue. Company remain debt-free and cash flow increased from HK$505.8 million to HK$689.3 million.

During the year Valuetronics acquired its 1st customer in the automotive industry one of the world largest tier-1 automotive system manufacturers with global footprint to supply data & media connectivity modules. Valuetronics is well positioned to ride on the rise of in-car connectivity.

FY2016 profit decline from HK$149 million to HK$120 million. Quarterly profit had already turn around. Profit for the 4 quarterly:
Q1 = HK$33.7 million
Q2 = HK$32.0 million
Q3 = HK$25.2 million
Q4 = HK$29.1 million
Q4 profit increased from HK$25.2 million in Q3 to HK29.1 million an increased of HK$3.9 million (15.5%) without CE segment contribution.

Moving forward Valuetronics business looks promising. Share price at 51.5 cents is trading at about 8x PE and dividend yield of 6.9%.