SINGAPORE (Sept 28): CIMB Research is reiterating its “add” call Valuetronics for its three-year EPS CAGR of 15.3%, 4.4% dividend yield and undemanding valuation of 10.4x CY18 earnings.
“We expect the robust sales momentum to sustain after the 1QFY18 results beat, underpinned by double-digit revenue growth in wireless light bulbs, transaction printers and automotive connectivity modules,” says lead analyst Ngoh Yi Sin in a Monday report.
Recent qualification by a second automotive manufacturer should also translate into earnings contribution from FY19 onwards while rising global adoption of smart home lighting and diversification to other product types with existing automotive client are potential longer-term drivers, adds Ngoh.
At a recent non-deal roadshow in Hong Kong CIMB hosted for Valuetronics, investors were generally impressed with the company’s track record and business prospects.
Valuetronics used to depend heavily on a single customer but this has been sharply reduced when the company made a strategic decision to exit the less-profitable LED lightbulbs and venture into the automotive sector.
Four major customers, representing different industry segments, contributed to about 60% of its FY17 topline versus two customers that generated 66% of its FY13 revenue.
As at 1Q18, Valuetronics also has net cash holdings of HK$719 million ($124.2 million). Excluding the HK$200 million set aside for working capital, CIMB estimates a war chest of HK$500 million for M&As.
“Such inorganic growth plans should not threaten its 30-50% dividend payout ratio, sustained by operating cashflow of HK$200 million per year on average over the past five years,” says Ngoh.
Despite operating at 80-90% utilisation levels, CIMB does not foresee this as a key bottleneck for Valuetronics given that investment of new machines is not hefty and only require 3-4 months’ lead time, and there is still 25% unused floor space which should accommodate any capacity expansion for the next 12-18 months.
Increasing automation of each production line could make three older ones obsolete, and it has a vacant site at Daya Bay facility earmarked for future construction of a new plant.
Valuetronics currently trades at 10.4x CY18 earnings with a 15.3% 3-year EPS CAGR, vs Venture’s 16.6x CY18 earnings and 22.7% CAGR. It is however trading at a 15% discount to peers which exhibit weaker earnings profiles.
As at 12.28pm, shares in Valuetronics are up 1 cent at 87.5 cents.
