Valuetronics - "Thoughts on the market".

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04 Jun 2014 13:07 #20060 by sykn
Dear all, I have been following all your postings on this counter, and because of your write-ups, I took the time to analyse its history with great care and decided to go in and buy some, as a value investment (to hold). Although I'm buying at a historical high price, the market is low margins and competition is very stiff, Valuetronics seems to be doing well, improving its balance sheet and innovating itself (e.g. getting rid of its licensing biz) to stay ahead. I am banking on its innovation and fighting spirit to beat the competition and yet take care of shareholders by giving good dividends, to sustain its share price. Hope I'm right. Once again, thank you for your recommendation.

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04 Jun 2014 13:32 - 04 Jun 2014 13:51 #20061 by ontheball
Of course the credit goes to our sifu Joseph Yeo. I also bought this counter after reading his recommendations.

However as with all shares, one has to look at both sides of the coin and much as I am very positive about Valuetronics, I am never the less reminded to be careful thanks to the article by Henry Tiong below:


Henry Tiong: "Is VALUETRONICS still good value after price run-up?"
Written by Henry Tiong
Sunday, 20 April 2014 12:02
Henry Tiong says he is an average Singaporean in his early 30s, has a full-time job, is happily married and caught within the sandwich class. He lives in an executive condominium with a "mountain-like mortgage". "My goal is to achieve financial freedom as early as I can. My target is 45 years old. I don't mind working but I hope to provide my wife an option not to work." The following article was recently published on his site Valuestocks.org and is republished with permission.


confused1THIS POST is in response to a reader's request on Valuetronics.

Specifically, the reader J asked: "What do you think of Valuetronics? Is it still worth investing in given its current pricing? What do you think of the executive director who just dumped 16 million shares?"

I used to be vested in Valuetronics. I bought Valuetronics at 21 cents in April 2013.

Had I held on to the stock, I would be sitting on 43% gain! (Last close is 30 cents). Alas! I sold it earlier this year for a 30% gain. Not too shabby but could have been better. Ahh, greed!!


Let's look at Valuetronics once more.

Cheap Earnings

If we take a look at most recent results announcement (Q3 2013), 9-months earnings per share is HK 29.8 cents.

A simple extrapolation brings estimated full year earnings per share to HK 39.7 cents or 6.4 cents (SGD).

Therefore Valuetronics is trading at less than 5 times earnings -- very cheap. Another way to read it is its reciprocal - Valuetronic's earnings yield (earnings divide by price) is 21%!

Cheap Assets

valuetronicschart4.14Chart: BloombergNet asset value (page 11 of the announcement) is HK 186.9 cents per share, or 29.9 cents (SGD).

Simply put, if Valuetronics has $1 net assets on its books, we are currently paying $1. Which is not too bad given its profitability.

In fact, if Valuetronics' profitability continues, its book value is set to increase year on year by 16%.

So would you pay $1 for a company who can turn its $1 into $1.16? Depending on your investment horizon, you might pay much more!

Cheap Dividends

Last year, Valuetronics paid out HK 8 cents dividends per share or 1.3 cents (SGD).

This works out to a dividend yield of 4.3% -- not too bad.

Furthermore, an observation about Valuetronics' past 5-year dividend track record (refer to annual report) reveals that dividend payout ratio is between 30% and 47%.

This means for this financial year, dividends can be between 1.9 cents (SGD) and 3 cents (SGD).

Dividend yield is therefore between 6.3% and 10%!

Conservatively Financed

One more thing to like about Valuetronics is its gearing level.

Casting an eye over the balance sheet on page 3, we can see that there are no borrowings.

So far, I think a assessment based on the above few metrics suggest that Valuetronics appears to be still cheap and hence desirable.

Of course, it is pure maths at this point and the market has its very unique ways to disappoint investors.


Considerations

(i) Asset profile does not match my understanding of an OEM.

I would expect Valuetronics to be capex-intensive.

Not for Valuetronics. Its PPE (machinery included) balance is lesser than cash, lesser than inventories, lesser than trade receivables.

Quite interesting, isn't it? Usually this is the type of profile that I associate with service-related companies.

Another angle

Valuetronics has HK 189 million worth of PPE but able to produce HK1.8 billion worth of sales (9 months).

Doesn't mean that it is not possible, but just beyond my circle of competence in understanding.

(ii) Management selling their stakes

J did very well by highlighting this point.

Looking back at its five-year history, management has consistently rewarded themselves with options priced lower than market prices and within a year or two offloaded them in the stock market. It happened in 2010, 2012, and now.

I really hate it when management sells their shares. The negative signalling effect really hits me hard as an investor.

Ok, fair enough that once in a while, you get the odd management executive who really needs some cash (for his car, house, mistress(es) - kidding!) and sells his stocks.

I prefer management to have a much much longer horizon than me the small retail investor. If he sells before I do, I just feel a bit insecure.



Lastly...

You might be wondering why I sold Valuetronics back in January?

Firstly, I did not fancy the reporting currency. Makes calculation a bit more complicated and they declare dividends in HKD too, meaning our dividends will suffer FX risk.

Secondly, I found another stock to channel the sales proceeds from Valuetronics to. So from one realised opportunity to another potential one.

Thirdly, there are too many things about the business which I am unsure of (which I detailed out in previous section - considerations). Unfortunately, it is a research limitation issue that cannot be overcome.

So I rather limit further downside risk by taking profits off the table. Sleeping well at night is a valuable thing to have too!

Hope the above helps you to form your own conclusion about Valuetronics!

END OF HENRY TIONG'S ARTICLE.

I hope other more experienced and knowledgeble investors than I am can comment on his views.
Last edit: 04 Jun 2014 13:51 by ontheball.

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04 Jun 2014 14:21 #20063 by lotustpsll
Not surprised at all when Valuetronics broke through all resistance level and now it settles comfortably at around 40 cents.

The giveaway on this super small cap was the potential yield > 10% when price was hovering around 20 cents and the consistent positive management outlook.

Besides the stronger performance, the one thing that stood out was the FCF generated (sgd45 million, sgd 12 cents ps) - clear reflection of its strong working capital management.

The views from parties concerned on this topic (notably from Joseph)is very positive and has led to financial gains. This is exactly what we should look for when contributing to this forum - positive discussion.

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04 Jun 2014 14:24 #20064 by sykn
Hey, thanks for sharing Henry's article; it's very helpful indeed. My own background (previous life) is in R&D in telecom and electronics, so if I take a bit more time to study into the technical side of this company, I should be able to figure out the conundrum of how an electronics company can make so much money with so little CAPEX. In general, this is possible if an electronics company's cutting edge (selling point) is brainpower (design and new technologies) rather than tools and equipment. Once I figure this out, I will share in this forum. In fact, I have avoided investing into companies that need to spend a lot on CAPEX (e.g. Midas), whether they be maintenance or new capability CAPEX, because it leaks away much of its hard-earned net earnings. Thanks again.

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04 Jun 2014 15:27 - 14 Jun 2014 12:19 #20066 by ontheball
Looking forward to your analysis SYKN.

I believe a good investor is one who knows the positive and is also aware of the downside risks of a stock. Then we can make measured and wise decisions on how we want to invest. Knowledge, be it positive or negative is power and the root of good decision making.
Last edit: 14 Jun 2014 12:19 by ontheball.

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07 Jun 2014 01:13 #20086 by lotustpsll
Finally we have a research house covering Valuetronics and this is its summary points.

Phillip Capital

"We believe it is more than fair that Valuetronics should at least trade at the peer average PE of 7.8x given that Valuetronics has, operated on good net margins of >5% vs the typical 3%, have never turned in a loss making year even from before IPO, and has done so without leverage (having a net cash ratio to market cap of ~50%). Assuming FY14 net earnings of $139M HKD, this implies a FY14PE of 5.5x at present. Valuating Valuetronics at 7.8x implies a value of SGD $0.48. Adding SGD $0.09 per share of idle cash gives us $0.57.

This is conservative considering we are only taking half the net cash into our value consideration, and the global GDP recovery and favorable LED lighting cycle should provide a tailwind buffer. Finally, to conservatively account for any unaccounted unsystematic risks, we apply a 25% discount and we arrive at our final fair value of $0.43 SGD. Or, a total 28% upside (inclusive of any dividend) from today’s price of SGD $0.335".

Currently the stock is trading on cum dividend hkd20 cts (estimated yield of 7.7%). Price broke through 40 cts convincingly.

Although the stock has a tremendous run-up over the past 6 months, I believe there is still further upside.

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