Valuetronics - Maybank Kim Eng 2019-06-10: Compelling Valuations

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Compelling Valuations

Valuetronics’ share price has fallen 10% since late-Apr, in part due to the US-China trade war. Our ROE-g/COE-g methodology suggests the current share price is imputing FY19-22E earnings CAGR of -22 to -29%, which is unlikely to happen as:
1. VALUETRONICS (SGX:BN2) is keen on expanding its Vietnam capacity to help customers bypass tariffs; and
2. most customers are stable/experiencing growth.
FY20-22E dividend yields of 7-8% should provide share price support. We believe earnings growth resumption is a catalyst.
Maintain BUY with unchanged ROE-g/COE-g Target Price of SGD0.99, based on 2x FY20E P/B.

In our scenario analysis, we assume an 18% reduction in Valuetronics' FY20E PATMI, factoring in risks of:
1. slower-than-expected smart-lighting and automotive connectivity modules sales if global consumer sentiment deteriorates significantly;
2. Valuetronics losing ICE allocation/ customers despite its expansion into Vietnam to insulate itself from the US-China trade war;
3. gross margin erosion from pricing pressure; and
4. underestimation of start-up costs in Vietnam.
Valuetronics's ROE-g/COE-g fair value of SGD0.83 is based on 1.7x FY20E P/B.

The smart-lighting customer has observed robust growth globally due to broadened offerings, and expects this momentum to continue through the year.
We believe ICE customers are stickier than CE due to:
1. stronger design involvement by Valuetronics;
2. smaller production scale; and
3. certain products requiring qualification.
Valuetronics has a strong track record of stable gross margins, and management has guided for this to be stable in the near term.

If our scenario analysis plays out, Valuetronics’ FY20-22E dividend yield would remain attractive at 5-7% (assuming unchanged 55% payout ratio). And the FY20E EV/EBITDA would still be an attractive 3x vs. 2.7x based on our current forecast. See Valuetronics' dividend history.
We believe valuation is compelling based on the upside to our Target Price for a company that is expected to sustain its decade long track record of double-digit ROEs during our forecast period.
In arriving at both the scenario analysis fair value and our Target Price, we used average adjusted FY20-22E ROE instead of average FY20-22E ROE. This is because we believe Valuetronics’s ROEs are depressed due to its massive cash hoard, which accounts for nearly 60% of its market cap.
Our FY20-22E average adjusted ROE assumes that HKD400m is invested in FY20E, earning 10% ROEs pa. In our view, HKD400m is a reasonable quantum for strategic investments, as it would leave ample room for working capital.
Similarly, we believe a 10% ROE expectation is conservative and should factor in the timing and return uncertainties of new investments.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-06-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.990 SAME 0.990