Henry Tiong: "Is VALUETRONICS still good value after price run-up?"

Henry Tiong says he is an average Singaporean in his early 30s, has a full-time job, is happily married and caught within the sandwich class. He lives in an executive condominium with a "mountain-like mortgage". "My goal is to achieve financial freedom as early as I can. My target is 45 years old. I don't mind working but I hope to provide my wife an option not to work." The following article was recently published on his site Valuestocks.org and is republished with permission.

THIS POST is in response to a reader's request on Valuetronics. Specifically, the reader J asked: "What do you think of Valuetronics? Is it still worth investing in given its current pricing? What do you think of the executive director who just dumped 16 million shares?"   I used to be vested in Valuetronics. I bought Valuetronics at 21 cents in April 2013.   Had I held on to the stock, I would be sitting on 43% gain! (Last close is 30 cents). Alas! I sold it earlier this year for a 30% gain. Not too shabby but could have been better. Ahh, greed!!

Let's look at Valuetronics once more.

Cheap Earnings

If we take a look at most recent results announcement (Q3 2013), 9-months earnings per share is HK 29.8 cents.

A simple extrapolation brings estimated full year earnings per share to HK 39.7 cents or 6.4 cents (SGD).

Therefore Valuetronics is trading at less than 5 times earnings --  very cheap. Another way to read it is its reciprocal - Valuetronic's earnings yield (earnings divide by price) is 21%! 

Cheap Assets

Chart: BloombergNet asset value (page 11 of the announcement) is HK 186.9 cents per share, or 29.9 cents (SGD).

Simply put, if Valuetronics has $1 net assets on its books, we are currently paying $1. Which is not too bad given its profitability.

In fact, if Valuetronics' profitability continues, its book value is set to increase year on year by 16%.

So would you pay $1 for a company who can turn its $1 into $1.16? Depending on your investment horizon, you might pay much more!

Cheap Dividends

Last year, Valuetronics paid out HK 8 cents dividends per share or 1.3 cents (SGD).

This works out to a dividend yield of 4.3% -- not too bad.

Furthermore, an observation about Valuetronics' past 5-year dividend track record (refer to annual report) reveals that dividend payout ratio is between 30% and 47%.

This means for this financial year, dividends can be between 1.9 cents (SGD) and 3 cents (SGD).

Dividend yield is therefore between 6.3% and 10%!

Conservatively Financed

One more thing to like about Valuetronics is its gearing level. Casting an eye over the balance sheet on page 3, we can see that there are no borrowings.

So far, I think an assessment based on the above few metrics suggest that Valuetronics appears to be still cheap and hence desirable.

Of course, it is pure maths at this point and the market has its very unique ways to disappoint investors.

Considerations (i) Asset profile does not match my understanding of an OEM. I would expect Valuetronics to be capex-intensive. Not for Valuetronics. Its PPE (machinery included) balance is lesser than cash, lesser than inventories, lesser than trade receivables. Quite interesting, isn't it? Usually this is the type of profile that I associate with service-related companies. Another angle Valuetronics has HK 189 million worth of PPE but is able to produce HK1.8 billion worth of sales (9 months).  Doesn't mean that it is not possible, but just beyond my circle of competence in understanding. (ii) Management selling their stakes J did very well by highlighting this point. Looking back at its five-year history, management has consistently rewarded themselves with options priced lower than market price and within a year or two offloaded them in the stock market. It happened in 2010, 2012, and now. I really hate it when management sells their shares. The negative signalling effect really hits me hard as an investor.   Ok, fair enough that once in a while, you get the odd management executive who really needs some cash (for his car, house, mistress(es) - kidding!) and sells his stocks.   I prefer management to have a much much longer horizon than me the small retail investor. If he sells before I do, I just feel a bit insecure.

Lastly...

You might be wondering why I sold Valuetronics back in January?

Firstly, I did not fancy the reporting currency. Makes calculation a bit more complicated and they declare dividends in HKD too, meaning our dividends will suffer FX risk.

Secondly, I found another stock to channel the sales proceeds from Valuetronics to. So from one realised opportunity to another potential one.

Thirdly, there are too many things about the business which I am unsure of (which I detailed out in previous section - considerations). Unfortunately, it is a research limitation issue that cannot be overcome.

So I rather limit further downside risk by taking profits off the table. Sleeping well at night is a valuable thing to have too!

Hope the above helps you to form your own conclusion about Valuetronics!

Thanks J for making use of the "Ask me about Stocks" function. What's your view on Valuetronics?
 

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