Valuetronics - UOB Kay Hian 2020-02-21: Temporary Disruption From Covid-19 Outbreak Largely Priced In

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Temporary Disruption From Covid-19 Outbreak Largely Priced In

On 19 Feb 20, Valuetronics (SGX:BN2) announced that its factories in China have resumed production this week. However, various measures implemented by the government in efforts to contain the COVID 19 outbreak will lead to a temporary drop in production capacity.
We estimate earnings impact of 7% for FY20, assuming one full month of disruption. We think the recent share price correction has largely priced in the impact of the outbreak.

Excluding the small, newly-leased site in Vietnam, Valuetronics (SGX:BN2)’s main production facilities are located in Daya Bay & Danshui Town, Guangdong, PRC, thus generating most of its revenue from China.
In its announcement on 20 Feb 20, the group highlighted that its factories at Huizhou, Guangdong province have resumed operations and production this week following the completion of an inspection carried out by the relevant government authority and the receipt of official notice for the resumption of operations.

In efforts to contain the spread of the outbreak, various administrative measures have been implemented including closed-off management in various cities in the PRC, and suspension or limited service of transportation facilities in various provinces in the PRC. As a result, Valuetronics’s workers are unable to return post the Chinese New Year holidays as planned. Thus, while its factories have resumed operations, management noted that the circumstances will lead to a temporary drop in the production capacity of its PRC factories.

Management shared that the factories will experience delay in resuming their operations to a level before the Chinese New Year holidays and will have difficulties meeting originally planned product delivery schedule. The group has issued notices to their customers that there may be delays in the original scheduled shipments. The group noted that the impact may results in a decrease of its revenue for the six months ending 31 Mar 20.

Given the reduced production days and shipment delays, we expect a y-o-y decline in revenue for the quarter (Jan-Mar 20). We do note that the first quarter of the calendar year (Valuetronics’s fiscal fourth quarter) typically contributes to a smaller degree of the group’s full-year earnings of approximately 23% due to the downtime during the Chinese New Year holidays.

We reduce our FY20-22 net profit forecasts by 7.0%, 4.2% and 2.4% respectively as we assume one full month of disruption.
Key risks include higher-than-expected loss of business due to the trade war and higher-than-expected decline in the CE and ICE segments.

Maintain BUY with a lower target price of S$0.85 (previously: S$0.91), pegged to a peers’ average of 12x PE for FY20. We think the share price correction since the COVID- 19 outbreak has largely priced in the disruption. Furthermore, at current prices, the stock offers an attractive 2020F dividend yield of 5.4%.
See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-21

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