Valuetronics - Maybank Kim Eng 2018-09-24: Minimal Impact From Flooding

VALUETRONICS HOLDINGS LIMITED SGX:BN2

Valuetronics - Minimal Impact From Flooding

Valuetronics management commented during an analyst briefing that production has resumed at its Danshui plant after four days of stoppages caused by Typhoon Mangkhut. We expect minimal earnings impact as Valuetronics will catch up on lost output through extra shifts.
Separately, management indicated there has been no material impact to its business following the latest round of U.S. tariffs, despite the company raising its estimate of the potential impact to less than 10% of its annual sales from 2-5% previously.
Our ROE-g/COE-g Target Price of SGD1.05 is unchanged, based on 2.3x P/B and FY19-21E average adjusted ROE of 21%. The attractive 7-8% dividend yield should provide share price support.

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Valuetronics’ Danshui plant experienced work stoppages from last Monday through Thursday (17-20 Sep) due to power outages caused by flash floods from Typhoon Mangkhut, while its larger plant at Daya Bay was unaffected. Danshui resumed production last Friday (21 Sep) and will ramp-up this week as new batches of raw materials are pulled in from suppliers.
Management indicated the bulk of the damage occurred to the raw materials inventory, while the production facilities and finished goods were largely unscathed because they are purposely located on higher floors.
We expect the potential adverse earnings impact at 1-3% of our FY19E, excluding any potential recovery costs not covered by insurance. However, the actual impact may be lower as management expects to catch up on lost production over the next two weeks.

Despite the increased proportion of revenue impacted by the tariffs, management has observed little adverse impact to its business as most customers have either chosen to absorb or pass-through the incremental cost.
Business conditions at customers have been healthy, suggested by the 90% utilisation rate for its SMT machines pre-Danshui flash flooding.

Valuetronics’ smart-lighting customer has expanded its range of innovative products, revamped its app, and launched into new markets over the past several months.
Separately, its automotive technology customer has been reporting double-digit sales growth for its infotainment sub- segment.
We believe these two examples from its market leading customers are positive indicators that Valuetronics’ secular growth prospects remain intact.

Weaker-than-expected end-demand for products that are customer or industry specific, as well as driven by adverse economic factors.
Cost increases for labour and materials.
Unforeseen pricing erosion for key products.

Lai Gene Lih Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-09-24

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