3QFY15 hit our expectations, Industrial & Commercial Electronics (ICE) growth pacing with Consumer Electronics (CE) decline. Successful transition to higher margin company with earning support this year due to US macro make this is BUY.

Not only is it cheap, but a satisfactory 3Q performance, there is a high probability for Valuetronics to beat our defensive forecast. With our very conservative FY15 net earnings forecast from last quarter, Valuetronics has already attained 85% based on 9M15 results. Using our conservative FY15 forecast and with recent share price of 40.5 SG cents, that corresponds to 6.5x adj. FY15 PE and 3.2x FY15 PE ex net cash.

Market fears overblown: Last 2 quarters have shown that the market fear on CE disruption has been excessive. The growth of ICE revenue (+4.4%) has kept pace with the decline of CE revenue (-10%) qoq, leading to a flat growth 9M15 vs 9M14 net income. For 2 quarters already, the major MNC restructuring had no obvious disruption to their client-supplier relationship. Hence, any declines in CE should not be due to client restructuring shocks, but due to the natural increase in competition due to the product phase in the innovation cycle. We are already discounted the gradual decline in CE while …

Growth drivers in place: ICE segment in the right place and right time. US manufacturing and spending looks good. Market should note that not only does the ICE segment operate at higher gross margins of ~19% (vs ~9% CE), it is also growing at a constant pace, and with tailwinds of improving US PMIs and a stronger US dollar. Recall that ICE customers are diversified niche leaders in industrial products that has a US market concentration, and Valuetronics is reaping the fruits of concentrating efforts in that segment.

Perception of Valuetronic’s business quality should improve because ICE has already surpassed the CE segment in gross income distribution accounting for about 60% of gross income. In addition, Valuetronics has been holding net income levels steady during this transition of declining LED retrofit bulbs. At some point in next few quarters, not only will market fears on the CE segment dissipate due to clarity of resolution of the major MNC restructuring (even now, there has been no obvious disruption of the client-supplier partnership), but Valuetronics will increase in margins based on product mix alone.

Buy: With a forecasted dividend yield of 7.5%, we think this cash-rich, transitioning to higher margins company is easily undervalued. Using our conservative FY15 net income forecast we maintain our conservative target share price of 0.495 SGD based on conservative 7x FW15 PE of 6.1 SG cents EPS with only 60% idle net cash added in.

Source: Phillip Securities Research - 11 Feb 2015