Valuetronics Holdings

UOBKayhian on 12 Nov 1013

Valuation

• Valuetronics Holdings Ltd (Valuetronics) is trading at 6.7x FY13 PE  and 0.8x P/B.

Results

• 1HFY14 revenue flat but gross profit up 11%. While revenue remained flat in 1HFY14, gross profit increased 11.4% yoy due to a higher contribution from the industrial and commercial electronics (ICE) segment. Gross margin improved from 12.0% in 1HFY13 to 13.1% in 1HFY14.
• Growing ICE segment. 1HFY14 revenue from the ICE segment increased 16.5% yoy with contributions from 2 new customers.
• No more profit drag from discontinued operation. With the termination of the licensing business in FY13, Valuetronics will not be incurring further expenditure for the loss-making business. Excluding the impact of the discontinued licensing business, profit from continuing operations increased 8.8% yoy for 1HFY14.

Investment highlights

• Net cash forms half of market cap. Valuetronics has a net cash position of S$0.127/share, which forms about 54% of its current market cap. Besides maintaining a strong net cash position for working capital requirements, Valuetronics’ strong balance sheet also serves as a form of reassurance to its existing and new customers with regard to the stability of its manufacturing capabilities and its ability to continue as a going concern.
• Stable dividend payout with attractive yield. Valuetronics has been paying out dividends to shareholders since its listing in FY07. Despite seeing a huge decline in profits after it discontinued its licensing business in FY13, Valuetronics still paid a dividend of HK$0.08/share (S$0.013/share), which translates into an attractive yield of 5.5%. Given that Valuetronics’ 1HFY14 net profit already forms 92.7% of its FY13 net profit, we expect to see a rise in dividends in FY14.
• Valued OEM partner of the world’s leading electronics brands. With 20 years of operating history, Valuetronics is a valued original equipment manufacturer (OEM) for several listed leading brands in the consumer, industrial and commercial electronics sectors. With its strategic relationships and quality production, Valuetronics has remained profitable, even during the 2008 economic downturn.
• Key risks. Rising labour and material costs continue to be a key concern for Valuetronics, as wages continue to rise in China.