Valuetronics

Kim Eng on 14 Oct 2014

• Initiate with SELL, TP SGD0.25 (4.4x FY16E P/E). Earnings forecast to decline in next two years.
• Major customer spinning off LED lighting business, given fierce Chinese competition, price wars and falling margins.
• Stock unlikely to perform until uncertainties blow over. We would be buyers only at SGD0.25 or below.

Facing uncertain future
Valuetronics faces an uncertain future as its largest customer – a  Dutch lighting, consumer electronics and healthcare conglomerate  - has decided to split its lighting business from the rest of its
businesses, in order to focus on higher-margin, less-challenging  segments. Lighting, in particular LED lighting, accounts for 40% of  Valuetronics’s revenue and 30% of its gross profit.

Lighting business dimming
Premium LED lighting brands are being undercut by cheaper  Chinese products. Valuetronics’s customer has had to cut its prices  as it repositions its brand in the consumer mass market. Valuetronics’s margins in 1QFY15E were affected by the price cuts.  Despite its customer’s split, the worst still lies ahead, in our view. We expect Valuetronics’s profits to decline in the next two years.

Industrial not yet ready to compensate
With the slump in lighting, Valuetronics’s Industrial business will  have to shoulder the burden of growth. However, we do not think  Industrial’s growth will be enough to offset the decline in the lighting-heavy Consumer Electronics division. Some 60% of  Valuetronics’s revenue comes from lighting products for its Dutch  customer.

SELL with SGD0.25 TP (4.4x FY16E P/E)
Valuetronics trades at 7.0x FY16E P/E vs a sector average of 9.9x.  However, with major uncertainties ahead, we believe it is likely to  underperform. Our TP assigns zero value to its lighting business  and 6-4x P/E to its Industrial and non-lighting businesses, or 60- 40% of its peer averages. Overall, we value the group at 4.4x P/E.