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Valuetronics: Inexpensive With A High Dividend Yield Of 8.8%
Corporate Digest | 28 September 2015
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By: Tan Jia Hui
Articles (82) Profile

Headquartered in Hong Kong, Valuetronics Holdings is an integrated electronics manufacturing services provider whose key products range from light-emitting diode (LED) to high precision global positioning system (GPS) products.

ICE Segment To Drive Growth

Broadly, Valuetronics’ business can be classified under consumer electronics (CE) as well as industrial and commercial electronics (ICE), with the CE segment being the main revenue contributor.

However, we are seeing a shift in importance towards the higher-margin ICE segment given the headwinds in the CE segment (driven largely by LED lighting sales) – slowdown in demand and downward price pressure due to cheaper Chinese products available.

Source: Company Annual Report

Strong growth in the ICE segment (FY15: 22.6 percent) is expected to mitigate the decline in the CE segment. Furthermore, overall gross margins are expected to improve as ICE gross margins are close to double that of CE (ICE: 18.8 percent, CE: 9.8 percent).

Valuetronics can also be seen as a proxy to US recovery, given that US sales represented 47.6 percent of FY15 revenue. As the US economy picks up, it is expected to benefit the group’s sales.

Zero Debt, Huge Cash Pile, Strong Cash Flows

During the analysis of the company’s balance sheet, two things immediately stands out – zero debt and a large cash pile of HK$534.4 million (approximately $96.9 million) as of 30 June.

The strong balance sheet is consistent when looking back over the past 10 years where the company has constantly been in a negative net debt position (cash higher than total debt) and had minimal or zero borrowings.

For the past five financial years, the group’s net profit has been steadily increasing, with the exception of FY13 where there was a decline in earnings due to termination of the licensing business, which incurred HK$23.6 million in termination expenditures.

On the cash flows front, Valuetronics’ also sports an impressive record. Apart from consistently clocking positive cash flows from operations, free cash flow (FCF) – an important gauge of a firm’s earnings power – has also been positive in the past four years (in fact, FCF has been positive for seven out of the past 10 years).

Undemanding Valuations

Based on the closing price of $0.41 as at 18 September 2015, Valuetronics’ market capitalisation stands at $155.9 million, with more than half of this value backed by its cash hoard.

FY15 (latest available full year) price to earnings (P/E) ratio stands at 5.7 times, a discount versus peer average P/E of 12.3times. On an ex-cash basis, Valuetronics shares are trading at a P/E of 2.2 times, making it an undervalued gem in our opinion.

Besides an undemanding valuation, a yield of 8.8 percent (based on FY14 dividend of HK$0.20, inclusive of HK$0.04 special dividend) makes Valuetronics shares seem even more attractive.

The group has paid out dividend yearly since its listing in 2007. In 2014, a formal dividend policy in was established, which aims to provide shareholders an annual dividend payout of 30 percent to 50 percent.

Coupled with the firm’s strong cash flows that should help sustain dividend payouts, Valuetronics make for a good dividend play too.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

Valuetronics Hldgs  0.645 -- --   
Business: Provides integrated electronics manufacturing services. [FY19 Turnover] Industrial & commercial electronics (58.9%), consumer electronics (41.1%).

Insight: May-19, FY19 revenue fell 0.9% to HK$2.8b due to w... Read More

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