• Downgrade to NEUTRAL from Buy, new Target Price of SGD0.78 from SGD0.82 reflects 4% upside with 5% FY19F (Mar) yield.
• Valuetronics reported a decent 3Q19, with PATMI rising 2.6% to HKD59.7m and GPM widening to 15.9% from 14.4%. However, its smart lighting segment will likely continue to face pressures.
• That, on top of the company missing out on US orders for new-generation smart lighting – which forms a significant chunk of its entire smart lighting orders – leads us to believe revenue will be impacted by 7-10%. As such, we trim FY2020F PATMI by 5%, which results in a lower DCF-backed Target Price.
• As its upside is now less than 10%, we also downgrade our call.

Industrial and Commercial Electronics (ICE) to Remain the Biggest Growth Driver

• VALUETRONICS HOLDINGS LIMITED (SGX:BN2)’s automotive segment will likely continue to grow at high double digits y-o-y, with margins being stable due to increased volumes and efficiencies. In addition, its sensing and printer segments will likely also continue to grow in 4Q19, on new projects secured.

Missing Out on US Orders for New-generation Smart Lighting

• Management said it has won manufacturing orders for smart lighting for the rest of the world (ex-US). We understand that US orders make up over 50% of its smart lightning orders. This is quite significant, as smart lighting makes up 10-15% of its topline as of 9MFY19. As a result, revenues should be impacted by 7- 10% from FY2020F onwards.
• On the consumer and household appliances front, management continues to see stable inflation-adjusted growth in its toothbrush and shaver segments. With the net-off effect from both segments, we expect the consumer electronics (CE) segment to still decline by 7-10% in FY19.

HOLD for Attractive Dividends

• As a result of the lower contribution from CE, we trim FY2020F PATMI by 5%, which results in a lower Target Price of SGD0.78. Due to the lower upside, we also downgrade our call to NEUTRAL.
• That said, we expect management to continue rewarding shareholders with respectable dividends due to its strong net cash position and cash flow generation. As of 1HFY19, an interim DPS of HKD0.05 has been declared.
• Investors can hold the stock for upcoming year-end dividends in the short-to mid-term.
• Key risks are an economic slowdown, forex risks, raw material price fluctuations and further earnings downside if the US-China trade war escalates.

Source: RHB Invest Research - 14 Feb 2019