Valuetronics Holdings Ltd - CGS-CIMB Research 2019-08-15: 1QFY3/20 One Step Closer To Vietnam


Valuetronics Holdings Ltd - 1QFY3/20: One Step Closer To Vietnam

  • Maintain HOLD on uncertain sales outlook and 7% yield, post results briefing.
  • Valuetronics's 1QFY20 results were mixed due to weaker topline and resilient net margins.
  • We see Vietnam expansion as long-term positive; up to HK$130m investment for geographical diversification and possible customer gains.

1QFY20 in line; resilience of net margin was commendable

  • VALUETRONICS HOLDINGS LIMITED (SGX:BN2) reported 1QFY20 core net profit of HK$47.8m, deemed in line at 26%/27% of our/ consensus full-year forecasts as we forecast a softer 2H. The y-o-y earnings decline of 2.8% came on the back of weaker topline (-7.1%) but helped by better gross margin (1Q20: 15.1%, 1Q19: 14.6%, 4Q19: 15.4%) on product mix changes and lower operating expenses.
  • Coupled with higher interest income, Valuetronics's underlying net margin was stable at 7.3% (1Q19: 7.0%, 4Q19: 6.3%), despite 20-25% of its 1Q20 revenue being subject to 25% trade tariff (but absorbed by customers), and its recent expansion to Vietnam.

Sales outlook remains uncertain

  • Consumer electronics (CE) sales fell 9.9% y-o-y on fewer printed circuit board assembly (PCBA) orders from its consumer lifestyles, as well as a sizeable order loss from its major smart lighting customer. We expect steeper sales decline for CE in subsequent quarters, as management indicated previously that c.10% of its FY19 total sales may be at risk of displacement due to customer’s reconfiguration of supply chain.
  • Revenue from the industrial & commercial electronics (ICE) segment also dipped 5.3% y-o-y on weaker demand across most customers. A shorter order visibility could mitigate the launch of some new product lines and moderate FY20F topline growth, in our view.

Vietnam expansion for longer term benefits

  • Valuetronics announced that its leased site in Vietnam has been qualified by its ICE customer and has begun mass production since Jun 19. There are plans to expand the existing capacity given rising customer interest in seeking alternative manufacturing solutions, which will require an additional capex of HK$20m-30m before end 2020.
  • Valuetronics also intends to acquire land to build its own manufacturing campus in Vietnam, which will allow it to diversify its footprint and convert potential new customers. We estimate such investment will not exceed HK$100m and will come in phases as utilisation ramps up; construction period could take at least a year.

Maintain HOLD with 7% yield and ex-cash FY20F P/E of 2.5x

  • We maintain our HOLD call and Target Price (pegged to 8x CY20F P/E, 30% discount to peers’ average), premised on near-term earnings weakness, attractive 7% dividend yield and strong net cash position (zero debt) which makes up 66% of Valuetronics's market cap.
  • Upside/downside risks: trade tensions, macro outlook and synergistic M&As.

NGOH Yi Sin CGS-CIMB Research | 2019-08-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.630 SAME 0.630