Valuetronics Hldgs Ltd - 1QFY12 results within expectations (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.225

Fair Value: S$0.41

1QFY12 performance within expectations. Valuetronics Holdings Limited's (VHL) 1QFY12 results were in-line with our expectations. Revenue accelerated 33.4% YoY but declined 0.9% QoQ to HK$527.1m. Gross profit rose 27.7% YoY but fell 2.6% QoQ to HK$84.2m while net profit rose 9.5% YoY and 12.7% QoQ to HK$31.6m. First quarter top-line and bottom-line was 3.7% and 0.8% above our estimates and formed 23.9% and 23.6% of our full-year estimates respectively.

OEM the shining star. The group's strong sales momentum was attributed largely to its OEM segment, which posted a stellar 36.1% YoY growth to HK$444.5m (84.3% of total revenue) thanks to a significant increase in demand from its largest customer. Its other core business, the ODM segment, also registered stable growth of 6.4% YoY to HK$68.5m, while the Licensing division delivered its fifth quarter of contribution to sales. While it is likely to take some time for this division to breakeven, we are encouraged by the ramp up in sales (HK$14.1m versus just HK$4m a year ago) and management's efforts to increase its product range of heaters, fans and air purifiers into more departmental and specialty stores. Notwithstanding VHL's positive sales growth, its gross profit margin experienced a 70 bps YoY decline to 16.0% as the OEM segment commands a smaller margin vis-a-vis the ODM segment.

Good working capital management. VHL exhibited good working capital management during the quarter as it generated positive operating cashflows of HK$44.7m (-HK$46.2m in 1QFY11) and also repaid all its debt. As at 30 June 2011, VHL's cash conversion cycle stands at 55 days, an improvement of four and fives days from 1QFY11 and FY11 respectively. We opine that VHL's healthy balance sheet would aid the sustanability of its business, especially in times of macroeconomic uncertainty.

Undervalued; favourable entry point. Moving forward, management remains cautious on the challenging business environment but we are encouraged that the group managed to secure a pipeline of new OEM customers, with expected mass production in early 2012. Hence contribution is likely to come in FY13. However, we update our HKD/SGD assumptions and also lower our target peg on VHL from 8x to 7x FY12F EPS as we take into account the uncertain global economic landscape, especially in the U.S. where a number of VHL's major customers are based. This in turn lowers our fair value estimate to S$0.41 (previously S$0.49). Nevertheless, with VHL now trading at 3.4x FY13F PER, against our projected EPS CAGR of 12.3% from FY11-FY13F and ROE of 26.0% in FY12F, we opine that valuations appear attractive. Reiterate BUY.