Valuetronics’ 1Q profit burdened by 11% decline in Consumer Electronics

But growth is possible if CE stabilizes.

Analysts are questioning Valuetronics’ value after its 1Q net profit grew 2%, a marked disappointment from consensus expectations of 9-10%.

According to DBS, the weaker results were mainly dragged down by Consumer Electronics (-11% y-o-y), as its key customer switched strategy and is moving to the mass market with lower pricing and larger volume.

Industrial sales, on the other hand, surged 36% y-o-y, compared to our 15% forecast. Unfortunately, Industrial’s outperformance failed to offset the decline from CE, leading to flat margins y-o-y.

Here’s more from DBS:
Growth catalysts are visible but momentum is hard to predict. Firstly, further ramp up of new Industrial customer started in Q1 and new engagements could result in overall growth for the group and better margins.

Secondly, it remains to be seen if CE’s customer’s new strategy of lower prices could create meaningful demand from a larger addressable market in subsequent quarters. However, erring on the side of conservatism, we have cut FY15/16F earnings by 10-11% to account for lower CE contribution and flat margins. Accordingly, we lower TP to S$0.65, still pegged to 10x FY15F PE.

Still attractive at 3x PE net of cash, 6% yield and 58% potential upside. VALUE exited 1Q with net cash of HK$440m or S$0.19/shr. Based on our revised forecast, the stock remains inexpensive at 3.3x FY15F PE net of cash and 6% yield.