SINGAPORE (June 22): RHB Research is raising its target price for Valuetronics to 85 cents, from 81 cents previously.
The higher target price, pegged to a 10x FY18F P/E, is on the back of a 5% increase in its net profit after tax (NPAT) forecasts for FY18F.
This comes after the research house notes “encouraging signs of improvement” during a visit to Valuetronics’ factories in China.
“We came away more encouraged by its efforts to improve automation and increase yield and margins, as well as ramp up activity for its factories,” says RHB analyst Jarick Seet in a Thursday report.
However, RHB is keeping its “neutral” rating on Valuetronics, the designer and manufacturing partner for the world’s leading brands in the Consumer Electronics (CE) and Industrial and Commercial Electronics (ICE) sectors.
Valuetronics’ CE segment had received a boost in FY17 due to its customer’s launch of a new smart lighting Wifi lightbulb in 2Q17.
CE segmental revenue increased by 19.7% to HK$987.1 million ($175.9 million) in FY2017.
While the ramp-up is expected to continue, Seet believes it is likely to expand at a slower pace of 11-14% in FY18F.
“We also estimate CE margins to narrow in FY18F, due to the cost-down element of these projects,” he adds.
Meanwhile, its ICE segmental revenue, which grew by 14.1% to HK$1.3 billion in FY2017, is expected to grow at 10-12% for FY18F, according to Seet.
Compared to FY17F levels, margins are expected to drop slightly in FY18F.
“There are a few potential new projects in the pipeline in Valuetronics’ ICE segment,” says Seet.
Already, Valuetronics has lined up new machines for a new manufacturing line to create in new product under its automotive segment.
According to Seet, Valuetronics is also looking to launch a new product for the temperature sensing field. At the same time, it is developing another new product with an existing customer.
In addition, Valuetronics is likely to utilise its cash pile of HK$752.9 million to grow further.
“It is on the lookout for M&A targets, either vertically downstream or horizontal businesses that fit and synergise with its existing units,” says Seet.
However, Seet warns that uncertainty hangs over Valuetronics’ old factory in Dan Shui, which will see its lease expire in 2020.
According to Seet, the group’s management has begun planning for the factory’s possible relocation as the likelihood of the lease being renewed in low.
“We expect this to incur capex of at least HK$100 million, coupled with a 3-year period to relocate and set up the facility,” says Seet.
As at 12.00pm, shares of Valuetronics are trading 1 cent higher at 80.5 cents.
