SINGAPORE (Mar 23): Maybank Kim Eng is starting coverage of Valuetronics at "buy" given the stock is on the cusp of a spectacular lift-off.
Maybank says this is due to rising demand for home IOT and car connectivity through a certain smart-lighting customer and Aptiv, the self-driving and connected car tech company.
Valuetronics also boasts robust customer relationships, strong and agile execution and efficient working-capital management.
"This is reflected in its consistent double-digit ROEs and strong cash flows since IPO in 2007," says analyst Lai Gene Lih in a Thursday report, adding this is a rare feat as EMS (electronics manufacturing services) companies’ earnings are often volatile.
"These underpin our above-consensus EPS forecasts for FY18-20. Strong cash flow should pave the way for 4.7-6.1% dividend yields," says Lai.
Maybank has a target price of $1.25 or 2.8 times FY19 book value.
Maybank estimates IOT bulbs and in-car connectivity modules account for the lion’s share of its 13-32% revenue-growth estimates for FY18-20.
According to research firm MarketsandMarkets, the IOT lighting market should grow by a 21.5% CAGR in 2018-23 to US$21 billion ($27.6 billion).
As an early mover, Maybank expects Valuetronics' lighting customer to benefit from rapid market growth in IOT bulbs until their commoditisation.
Elsewhere, Valuetronics' growth from Aptiv could spring from wider acceptance in FY19.
"We estimate that 45 car models now carry Valuetronics' connectivity modules, up from 30 in 2016," says Lai.
Meanwhile, Valuetronics' cash flows helped it build up a strong cash position of HK$672 million or 28% of its market cap as of 3QFY18 and pay attractive dividends.
As at 4.36pm, shares in Valuetronics are down 1 cent at 94 cents or 11.5 times FY18 forecast earnings.