Valuetronics dearth of near term cataylsts

Fair value S$0.20


• Hit by one-off termination expenses and provisions
• But 2QFY13 core PATMI rises 34.1% YoY
• Customers adopting conservative stance

2QFY13 core PATMI exceeded expectations
Valuetronics Holdings Limited’s (VHL) 2QFY13 revenue from continued operations (excluding its Licensing segment) was flat YoY at HK$595.5m (+0.2%), or 11.6% below our forecast. Reported PATMI plunged 88.5% YoY to HK$3.3m as VHL incurred hefty termination expenditure and provision for impairment on property, plant and equipment (PPE) from its Licensing division (announced its decision to cease operations during its 1QFY13 announcement). Adjusting for this and other exceptional items, we estimate core PATMI of HK$31.5m, a 34.1% YoY increase, and this exceeded our HK$26.2m projection. With regards to its Licensing division, VHL said that it does not expect to incur further provision for termination expenditure and impairment losses for PPE.

Moderation in growth from largest customer
Although VHL enjoyed exceptionally robust revenue growth from its largest customer from the LED lighting industry over the past several quarters, we believe that sales would likely moderate moving forward. Hence this could limit VHL’s growth opportunities as the group is also seeing a general sense of prudency amongst its major customers in light of the vagaries of the macroeconomic environment.

Maintain HOLD; expect lower DPS
We trim our FY13 and FY14 revenue estimates by 9.7% and 10.6%, but raise our core PATMI forecasts by 8.0% and 6.5%, respectively, on higher margin assumptions. We also adopt a more conservative PER peg of 4x (previously 4.5x) on VHL given its challenging outlook in the foreseeable future. Rolling forward our valuations to blended FY13/14F core EPS, we derive a reduced fair value estimate of S$0.20, from S$0.21 previously. A cut in DPS for VHL is highly likely in FY13, in our opinion, based on the estimated dip in our FY13 PATMI projection from FY12. Our 11 HK cents DPS forecast for FY13 translates into a payout ratio of 46.3% and 8.9% yield. While yield is attractive, we maintain HOLD given the lack of near-term catalysts.