Source: CIMB

No signs of major slowdown
Normal seasonal patterns heading into the slow March quarter. Our post-results meeting with management has reaffirmed our belief that there is no major cutback in orders from customers despite the jittery economic environment in the US. The seasonal weakness is expected to fall within historical norms. This corroborates comments from the world?s econd-largest contract manufacturer, Flextronics (FLEX US, US$11.70, NR), two days ago. Management, however, did highlight that a few of its customers in the US have turned more cautious after Christmas, but is confident of achieving healthy yoy growth on the back of new customer and contract wins.

Extending services to include co-development/ODM work for Philips. Valuetronics?s relationship with Philips has strengthened following the completion of its R&D capability audit by the latter at end-2007. This could potentially enable Valuetronics to do co-development or ODM work for Philips moving forward, transforming its services from pure contract manufacturing of PCBA. Already, it is in discussion with Philips for a low-end shaver project. The integration of Philip?s Domestic Appliances and Personal Care (DAP) and Consumer Electronics divisions into one unit (Consumer Lifestyle Group) with effect from Jan 08 has not affected Valuetronics?s business dealings with Philips. In fact, there could be more opportunities for Valuetronics as the person in charge of the merged entity was previously from the DAP division.

New programmes in the pipeline. With the exception of KitchenAid, the group is still working with its major customers on several new programmes that will start mass production in FY09. These include: 1) co-development work with Philips on low-end shavers, and extending its services to other Philips locations; 2) new baby monitors with vibration functions for Graco in both the US and Europe. Valuetronics was previously only involved in the US market; 3) inkjet-based printers for Transact, targeting the banking sector (Valuetronics was only involved in the gaming and lottery sectors before) as well as extending its services to include fulfilment (i.e. drop shipments directly at Transact?s customers); 4) second product development for Sensitech in temperature monitor products. It will also start doing some fulfilment work for Sensitech in FY09; 5) hemisphere GPS for GPS modules and box-build products. Also, the company is in discussions with several customers in the industrial products segment for potential business.

No impact from recent snow storm. The company said it was not affected by the recent snow storms in China, and its facilities will be shut for about two weeks for the Chinese New Year holidays.

Committed to 30% payout at least. Management reiterated that the company will be paying out at least 30% of its earnings. We believe this is not an issue in view of its strong balance sheet (close to HK$170m of net cash as at end-Dec 07), and strong operating cash flow. Dividend payments could thus be about HK$0.06-010/share in FY08-10, for prospective yields of 6-8%.

Further information on 3QFY08 results
Top five customers accounted for 71% of sales in 3QFY08, down from 76% a year ago. Its top five customers remained unchanged: Philips, KitchenAid, DYMO, Graco, and Transact. Among them, sales from KitchenAid and Transact dropped yoy due to a lack of new product introductions. The company will redirect its resources for KitchenAid to the Home Depot ODM business. Philips posted the strongest yoy growth as the group started to serve more locations. Of its top five customers, Valuetronics expects continuous growth from all except KitchenAid, based on projects in the pipeline.

Impact of new labour law will not be significant. The company reaffirmed that the impact of China?s new labour contract law, which came into effect on 1 Jan 08, is not significant as total labour costs accounted for only 5% of group revenue. The HK$6.4m provision in 3QFY08 was one-off, and the mandatory 1-month compensation for all employees with more than 12 months of service will only add HK$1m-1.5m to costs per quarter, or less than 1% of revenue, moving forward. It hopes to make up for this through productivity gains as well as greater economies of scale.

Valuation and recommendation
Low valuations with attractive yields. Valuetronics is trading at an attractive 3.8x CY08 P/E against a 20% 3-year EPS CAGR for CY06-09 and ROEs of more than 30%. EV/EBITDA is even more attractive at only 1.2x due to its net-cash position. Our target price of S$0.43 pegs the stock at only 8x CY08 earnings, which we believe is not excessive, and supported by yields of 7%. Maintain Outperform. We see catalysts from continuous sets of good results and possible upside surprises in dividend payment.