Valuetronics Holdings

[GFG]

Wonder if valuetronics is a steal or value trap?Tough to believe it is trading at current price.

1) Valuetronics has a decent yield
2) extremely low valuations at 4.5 times forward PE, ROE upwards of 20%
3) High cash per share ($0.18).If you take cash away, it only needs two years of current earnings and the business comes FOC.
4) Super strong free cash flows in recent years
5) Improving margins in the past 7 quarters
6) Philips have been reporting super strong growth LED sales
7) Trading below NAV. And NAV comprises majority cash and the rest are receivables/inventories. If we take Philips as a majority( above 50% of rev) customer, these receivables/inventories value should be solid.Hence NAV is a solid figure.

any negatives that i might have missed?Other than mgmt giving themselves cheap stock options(not yet vested)

1) Yield is more than just decent. If you bought it just a few months ago, i think yield can hit double digits.
2) ROE for the past 5 years from 2009 are:
16.41%
15.68%
25.50%
22.90%
13.29%
Not exactly upwards of 20% consistently
4) Free cash flows for last 4 yrs are (in '000):
1,095
-35,521
195,268
41,248
5) I dont look at q-o-q but on an annual basis:
GPM for the past 6 years are:
20.59%
17.40%
15.61%
15.72%
14.04%
12.23%
Its not improving but actually decreasing GPM instead.
6) Yes certainly. Bear in mind though that Philips uses more than 1 manufacturer, but sure, it definitely does help if your client account for >50% of revenues does well
7) NTA is 186.9 HK cents (approximately 29.9 SG cents)
Current price is between 28 - 29 cents, so it is trading at just very slightly below NTA.
However, there are a bunch of share options with exercise prices way below the current market price. So I would actually take into account this dilutive effect. Adding in the options, the NTA then becomes 178.2 HK cents (28.5 SG cents)
So i pretty much consider it as near to NTA currently.
That's a more conservative calculation.

<vested 700lots>

Hi, just want to clarify my own point 7)
The diluted NTA of 178.2 HK cents I wrote is a conservative estimate.
The actual diluted NTA is likely to be higher, as I did not include the capital the company will gain from the exercise of the options.

[CY09]

Valuetronics 9mths EPS is 29.9 cents. Extrapolating it to a full year EPS, lets estimate it to be 39.8 cents HKD. In my view, the mgmt. will again declare 40% as pay out which may amount to 16HKD cents or 2.61 sg cents (same as 2 years ago).

Is this dividend sustainable? From the latest quarterly FS, valuetronics operations generates about 50m HKD OCF before WC changes per Q. Extrapolate to a full year, it is 200M HKD generated. The company has been generating about HKD 170-220M of OCF before working capital changes for the past 3 years. Assuming HKD 45M is set aside for Capex, the coy generates about HKD 155m cash. If all stock options are exercised and the coy declares 0.16HKD dividends, dividends will be around HKD 61.5M.

Given its current cash pile and cash flow generating abilities, a dividend of HKD 16 cents seems sustainable over the next 3-4 years (*barring this company being a fraud or CEO/Chairman runs away with the money).

So what valuations can one give to this company, going by a 5% div yield, the company is worth about 52 sg cents. Using a 10x P/FCF, the company is worth about 65.8 cents; I assumed 383.5M of shares due to share options. This thread is not an advise on when to buy/sell the shares.

<vested for almost a year>

[mrEngineer]

Wow. ED sold more than half of his stakes.. The key question is who is the buyer of 4.8m? A greater fool?

[sgpunter]

I have divested my stake at a good profit. Valuetronics Management has a habit of selling a large chunk of shares which have been obtained cheaply via stock options. To be honest, nothing inherently wrong with that but I don't like it personally and furthermore, selling shortly before Q4 results are out. If Management thinks there is much upside after release of Full Year results, they would have waited awhile more and sell after that.

Anyway, the above is merely my personal opinion. Good luck to those vested.

[GFG]

I have divested my stake at a good profit. Valuetronics Management has a habit of selling a large chunk of shares which have been obtained cheaply via stock options. To be honest, nothing inherently wrong with that but I don't like it personally and furthermore, selling shortly before Q4 results are out. If Management thinks there is much upside after release of Full Year results, they would have waited awhile more and sell after that.

Anyway, the above is merely my personal opinion. Good luck to those vested.

Thanks for sharing
No doubt a large reason why u sold out is cos the ED pared his stake substantially
I have 700 lots bought last yr, at ard 0.24 and am still holding on.
You are right, management has a history of awarding themselves options and exiting to profit shortly after.
I disagree though, that this is "normal" and accepted. In fact I indicated in my earlier posts that this is a cause for concern. The idea of options is to align man. interests in the long run. The way the options are structured, low exercise price with no lock in period etc, means it is just to compensate them without coming up with cash. Basically using company shares and the markets potential mispricing to fund the compensation. It's not uncommon, but I don't like it personally. So yes, it is a red flag.
I am still holding on though, as my projections show the 4Q is still likely to show record profits and I believe, record dividends at least matching the previous high 2 yrs ago. That's a yield of 10% or so from my purchase price and still >5% from current price.
Also, management has sold previously even when the subsequent results weren't too bad. I think they cannot also time it so exactly such that shares are sold immediately before a bad result release and vice versa. Obviously that's insider trading, so I believe it's not reflective of the next quarter results
But I do agree that it does show that valuetronics will likely show volatile results, and going forward, the ED either has no confidence, or no visibility about the results in a 1-2yr horizon
Still undervalued and my personal fair value is closer to $0.36

[NTL]

I am still holding on to my Valuetronics too.

I have went through the past few years of stock options granted. They are all granted at close to 20% discount from the traded price, and can only be exercised 2-3yrs after the options are issued. Is the discount too much, or the holding period too short? I had never been in a company that issue stock options before to understand. But compare to Facebook's CEO's 6c stock options, I think this is not that ridiculous.

Whether if the sales by the ED is the lack of confidence, will have to wait till Q4 results to know. It could be an institution fund looking to buying into the company, but due to the low liquidity, it is not possible for them to buy from the market without pushing the price too far up. And the company has see no reason to issue more shares to satisfy their new shareholder. We will know in the next AR who the buyer is.

I have a higher assessment of Valuetronics. Using CY09's extrapolate figures, the EPS in SG Cents will be somewhere around 6.4c, and the company is holding cash close to 17.6 SG Cents per share. Stripped off the cash, the PE of the company is currently only standing at 2. Imagine if you take over this company, you can take back all your investments within 2yrs. This is very very low. To me, a PE of 5-8 (ex cash) will be more reasonable. This will give the company a value of around $0.50-$0.68.

At $0.50, the projected dividend yield will be close to 5%. For a small cap company, I will think a dividend yield of 6-7% will be pretty reasonable for most investors, thus based on 6% yield, the share price should be around $0.43. Hopefully they are willing to increase the payout ratio, and that will definitely drive up the share price. With the huge cash hoard, I won't mind a capital reduction exercise too.

[GFG]

Unlikely to be an institution or fund, cos it's a simple disposal on open market, not a married deal

Any reason or advantage why u would value it by stripping off the cash?
Why a PER ex cash?

[NTL]

Based on the announcement, it was an off-market married deal, not an open market transaction.

http://infopub.sgx.com/FileOpen/_eForm1-...eID=290126

Why I stripped off the cash is that if I am able to takeover the company, the cash in the company will become mine. If I am paying 30c per share for the company, I took back 17.6c immediately, so effectively I am paying 12.4c for it. If the company continue to generate profit of 6.4c per share of profit, it will only take me 2yrs to take back my investment.

Hmmm... Please correct my logic if I am wrong, as I am still an amateur investor.

[dzwm87]

Theoretically, that is correct but the truth is we will never be able to gain control over management. The ED definitely have a better look into the company's books than us. The sale is a red flag but 4Q is still worth the wait. I wouldn't bet on anything after that. On normalised market conditions, it is not worth paying for an OEM earnings growth.

[mrEngineer]

As we know from Peter Lynch, there are many reasons why insiders want to sell and we are unable to evaluate from bystander point of view. For e.g. ED got burnt in HK property, margin call due to lending of stocks or even political dispute so that ED will step downr? A married deal requires that the transaction price not more than 10% of current price. So who is buying at higher than market price? One interesting point may be the buyer is a new kid on the block as the threshold of 5% was not crossed despite 4.4% of shares were transacted assuming if the married deal is done with a single entity and not black pools etc.

Fundamentally without the discontinued operations, Valuetronics indeed look more interesting. However, there is an implicit assumption that the dividend payout ratio will be maintained. And we will only know that in May.