Valuetronics Holdings Ltd - CGS-CIMB Research 2018-09-21: Seeking Relief On Tariffs And Flood


Valuetronics Holdings Ltd - Seeking Relief On Tariffs And Flood

  • We recently spoke to management on the impact of flooding and the trade war. No change to our forecasts and ADD call, with attractive 6.9% yield.
  • Danshui plant has reopened, with production expected to gradually ramp up.
  • Impact of new tariffs could constitute no more than 10% of total revenue.

Danshui plant reopens after 4 days of temporary shutdown

  • Following Valuetronics’ 17 Sep 18 announcement of a temporary shutdown of the Danshui plant due to flash floods caused by Super Typhoon Mangkhut, the company subsequently reported on 21 Sep that power supply at the plant has since been reinstated, and all production facilities have reopened. The majority of production facilities have not been impacted, though there was some damage to inventory, whose replenishment is underway and details of full insurance coverage are being worked out.

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  • Management expects production to gradually ramp up over the next two weeks to make up for the possible shortfall in volume.
  • Valuetronics’ main manufacturing facility at Daya Bay remains intact and continues normal operations. The Danshui plant is the older plant which caters mainly to the production of smart lighting and electronic toothbrushes by the Dutch MNC, while Daya Bay houses production for auto and other industrial & commercial electronics (ICE) customers.

Possible impact from new tariffs still limited to 10% of total sales

  • Based on a preliminary assessment of the updated tariff list, management has guided that less than 10% of total revenue could be directly subjected to the higher tariffs as a result of the US-China trade war.
  • Amongst the affected customers, we think those with higher product margins are likely to absorb the additional costs, while others could request for some cost-down, in which case a small discount could be offered out of goodwill.
  • Discussions with customers remain ongoing, though management has not observed any significant change in sentiment or orders. Should the trade war escalate, Valuetronics could actively seek other options with customers, including the relocation of some operations to Southeast Asia, most probably via partnerships.

Expect q-o-q improvements in 2Q19F, with attractive valuation

  • We expect the normalised inventory level and robust demand of smart lighting to drive a higher q-o-q consumer electronics (CE) sales in 2Q19F, but this is unlikely to improve significantly y-o-y given the high revenue base in 2Q18 and 3Q18. We believe the strong growth trajectory for auto connectivity modules will continue, thereby mitigating some CE weakness.
  • Overall, we maintain our FY19F EPS growth of 2.9%, and look forward to a stronger recovery of 17.5% EPS growth in FY20F. At the current level of 6.8x FY20F P/E (3.5x ex-cash basis), we also think there is value in the stock, supported by its attractive dividend yield of 6.9%.
  • We make no change to our forecasts, ADD call and target price of S$0.95, pegged to 10x CY19F P/E.
  • We believe management’s recent share buyback of 630k shares at S$0.6334/share could be seen as a vote of confidence in the longer-term prospects of the company.

NGOH Yi Sin CGS-CIMB Research | 2018-09-21
SGX Stock Analyst Report ADD Maintain ADD 0.950 Same 0.950