Valuetronics Holdings Limited

OCBC on 21 June 2012

We believe that Valuetronics Holdings Limited (VHL) remains poised to leverage on the growth potential of the LED lighting market, given the positive sentiment from its largest customer within this space. We expect sustained orders for VHL in the near-to-mid term, although a likely trade-off from higher volume orders would be a compression in its gross margin. Meanwhile, downside risks from macro headwinds remain. We estimate that VHL’s Licensing segment would breakeven only in FY14, although operating losses are likely to narrow in FY13. We opine that VHL offers a good investment opportunity for investors looking for small-cap companies with attractive dividends. Coupled with cheap valuations as the stock trades at 4.1x FY13F PER, versus our projected EPS CAGR of 7.6% from FY12-14F, we maintain BUY and S$0.315 fair value estimate on VHL.

LED market has good growth potential despite pricing pressure
We believe that Valuetronics Holdings Limited (VHL) remains well-positioned to leverage on the increasing penetration rates of LED lighting. This is driven by increasing urbanisation and growing demand for environmentally-friendly lighting solutions. Many governments are also phasing out inefficient lighting technologies, thence leading to faster adoption of LED-based lighting solutions. A study conducted by the US Department of Energy has highlighted the potential of LED lighting to conserve energy and enhance lighting quality and performance vis-à-vis that of many conventional lighting technologies. Given that sentiment from VHL’s largest customer is still positive on this front, we believe this would lead to sustained orders for VHL in the near-to-mid term. A likely trade-off to this would be a compression in its gross margin from the higher volume orders, coupled with pricing pressures typical for LED products.

Licensing division likely to breakeven in FY14
Despite the positive outlook from its largest customer, downside risks from macroeconomic headwinds cannot be negated. While the U.S. reported a 5.3% YoY increase (-0.2% MoM) in retail sales for May, this was the lowest YoY growth reported since Aug 2010. Concerns over the eurozone debt turmoil and tepid labour market have undoubtedly stymied consumers’ ability and willingness to spend. We reckon this could have some adverse impact on VHL’s Licensing segment, although we still forecast sales to grow in FY13 and FY14 as the group expands its product portfolio and sales channels. We also expect smaller operating losses for the segment in FY13, and estimate breakeven to occur in FY14.

Reiterate BUY given cheap valuations and attractive yield
We opine that VHL offers a good investment opportunity for investors looking for small-cap companies with attractive dividends (last declared DPS of 17 HK cents, implied yield of 11%, trades ex-div on 23 Jul 2012). Current valuations are also cheap, in our opinion, with the stock trading at 4.1x FY13F PER, against our projected EPS CAGR of 7.6% from FY12-14F. Reiterate BUY and S$0.315 fair value estimate.