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Broker's take: CIMB initiates coverage on Valuetronics; sees gross margin, EPS upside

CIMB Securities has initiated coverage on Valuetronics Holdings with a target price of S$0.56, above the market close of S$0.43 at the end of March 9 trading day.

Valuetronics is a Hong Kong-based electronics manufacturing services (EMS) provider with a 60/40 sales split between the consumer electronics (CE), and industrial and commercial electronics (ICE) segments.

CIMB noted a steep fall in Valuetronics' nine-month revenue for FY2016 following its exit from the highly competitive, less profitable mass-market LED (light-emitting diode) segment.

However, the brokerage house maintains the revenue slide from the LED exit has been priced in.

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"We estimate FY15 gross margin of 13.6 per cent to improve to 15.2 per cent in FY16 (as) sales of the remaining lifestyle products are expected to rise steadily at 3-4 per cent in FY17-18," a CIMB March 9 research note said.

The research note added that through a recently acquired customer which supplies media connectivity modules, "Valuetronics is able to expand into the automotive sector, with potential for greater growth when it gets qualified by other OEMs" (original equipment manufacturers).

CIMB said "the change in sales mix", with the ICE segment filling the gap of diminishing CE sales, will boost margins at Valuetronics. "We project FY17-18 EPS (earnings per share) growth at 12-16 per cent per annum."

Valuetronics has a track record of paying dividends (payout ratio of 45 per cent for the past five years on average), making it an attractive dividend play.

CIMB forecast Valuetronics' FY16-18 dividend yield will range from 6.6 to 8.3 per cent.

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