DBS Vickers: "On net cash basis, PE of VALUETRONICS (51.5 c) is 3.7x FY15F"

Excerpts from DBS Vickers analysts' report

Analysts: TAN Ai Teng & LING Lee Keng

Valuetronics_ICE7.14 Examples of industrial and commercial electronics (ICE) products manufactured by Valuetronics.

• Compelling at 7x FY15PE and only 3.7x ex-cash plus 5.6% dividend yield
• Growth is backed by US/Europe recovery and an expanding customer base
• 40% upside to our TP of S$0.72 at 10x FY15 PE; initiate coverage with BUY.

Electronics design and manufacturing provider with differentiated product portfolio. Hong Kong-based Valuetronics provides electronics manufacturing services (EMS) for US and European MNCs.

Its key products include LED lightings, personal grooming devices and transactional devices, and industrial positioning, monitoring & diagnostic equipments. Broadly, Consumer Electronics (CE) accounts for 68% of group sales and Industrial & Commercial Electronics (ICE), 32%.

Steady proxy to economic recovery. The global recovery underway would support, or even accelerate, Valuetronics’s growth through its expanding base of US/European customers. Overall, we expect net profits to grow 7-12% within these two years.

Steady profit growth aside, Valuetronics is exceptional in generating positive free cashflows to sustain its attractive dividend payment. Valuetronics reported HK$478m net cash (S$0.30/sh) as at end of FY14.

Initiating coverage on Valuetronics with a price target of S$0.72. Valuetronics has doubled YTD, but the stock is still cheap at 7x FY15, with half its market cap backed by net cash.

Our TP, based on 10x PE multiple, is in line with peers’ average but at the high end of its historical trading band, which can be justified by a record high earnings visibility. Meanwhile, stronger-than-expected quarterly earnings could serve as a catalyst.

valuetronics_TseChongHing7.14 Valuetronics Chairman and MD Tse Chong Hing. He joined the Group in Nov 1996 as the Assistant to the then MD.
Photo: annual report

CE would continue modest growth as key product enters mass penetration phase. As the bulk of Valuetronics’s sales is driven by LED lighting, we are optimistic the company will enjoy higher LED volume as this key lighting product enters mass adoption stage, especially at consumer level.

However, average selling prices would also be declining. Hence, we have conservatively forecasted 2% revenue growth vs projected industry growth rate of 5%.

Industrial & Commercial Electronics segment offers more growth and higher margins. Valuetronics mainly manufactures transactional devices, industrial positioning, monitoring & diagnostic equipment for industrial and commercial customers in this segment. We believe ICE would be Valuetronics’s key growth driver, given its higher profitability and bigger customer base.

Based on the company’s reported segmental results, we note that ICE segmental margins for FY13 and FY14 were 17% and 19% respectively compared to 10% for CE business.

ICE grew a stronger 24% in FY14, mainly because of strong volume boost from two customers who have diverted production to Valuetronics as they reduced or shut down internal production.

This year, we expect segmental sales growth to moderate a little to 15% as the relocation effects wear off but Valuetronics would continue to grow its ICE customer base.

Value_chart7.14 Valuetronics closed at 55.5 cents and has a market cap of S$204.78 million. Trailing PE: 10.67. Chart: Yahoo Finance.

Recent story: @ VALUETRONICS' AGM: "Why hold so much cash?" and other questions

DBS Vickers: "On net cash basis, PE of VALUETRONICS (51.5 c) is 3.7x FY15F"

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