LANTROVISION

UOBKayhian on 27 Aug 2014

VALUATION

• Downgrade to HOLD but with a slightly higher DCF target price of S$0.70.

FINANCIAL RESULTS

• FY14 net profit to owners jumped 52.6% yoy to S$13.9m (103.6% of our forecast) due to higher revenue and lower allowance for impairment loss. Excluding allowance for impairment loss, adjusted profit before tax would have risen 44% yoy.
• Strong free cash flow, as net cash position increased from S$75m in FY13 to S$83m (S$0.31/share) in FY14, forming 48% of the current market cap.
• 4.7% dividend yield as S$0.03 dividend was declared, representing a 58% payout (FY13 DPS: S$0.02; 54% payout).

OUR VIEW

• The rise of the internet of things. As the world gets increasingly connected (from smartphones to computers, lamps etc), there is an increasingly large quantity of data that will need to be processed and analysed in real time, thus generating an increase in workload and demand for data centres. According to Gartner, by 2020, the internet of things (IoT) will include 26b units installed and help generate incremental revenue of more than US$300b for IoT product and service suppliers.
• Beneficiary of increasingly smart cities. Besides benefiting from the rising number of data centres in the region, there is also scope for expansion in the use of structured cabling systems. For eg. Data can be collected and sent through structured cabling to be analysed for more efficient planning and use of office space, resulting in rent savings for business owners.
• More shareholder-friendly. We applaud management for its dividend payout (S$0.03) this year as it shows commitment to rewarding shareholders. This is the third consecutive year Lantrovision had paid out dividend (FY12: S$0.01; FY13: S$0.02). In addition, with greater visibility over Lantrovision’s blue chip clientele, we think it also increases the level of investor confidence in the company.
• Our previous valuation is based on very conservative assumptions of a discount rate of 13% and 0% growth rate. With a display of greater commitment to rewarding shareholders with dividends coupled with increased visibility of its blue chip clientele, we believe the company deserves a lower risk premium. We lower our discount rate to 11% from 13% previously.
• Downgrade to HOLD with a slightly higher target price of S$0.70. Lantrovision is currently trading at 7.6x ex-cash FY15F PE. We continue to like Lantrovision for its strong balance sheet, attractive dividend yield (4.7%) and positive industry outlook as it rides on the data centre boom in the region. However, with the recent price surge (the stock has gained 34% since our initiation in May), we think the risk and reward balance has become less attractive. Recommend entry at S$0.58.