Valuetronics - CGS-CIMB Research 2020-03-10: Hold For 7.5% Yield, Strong Net Cash

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Hold For 7.5% Yield, Strong Net Cash

We cut our Valuetronics (SGX:BN2)'s FY20-22F EPS by 4.1-13.1% to account for Covid-19 disruptions, mixed customer outlook, and possible macro slowdown. Reiterate HOLD.
Cashflow generative, strong net cash of S$0.42/share, and 7.5% dividend yield are key positive attributes, and could limit downside for the stock.

Improved order visibility and customer gains could re-rate the stock. We would bargain hunt close to 1 s.d. below historical mean (6.2x forward P/E).

Valuetronics' share price has de-rated since the Covid-19 outbreak, factoring in the revenue loss and supply chain disruptions as both its factories are based in Huizhou, China (apart from a leased site in Vietnam which formed less than 10% of production capacity).
While operations have resumed in the week of 17 Feb, production levels remain below pre-CNY level due to shutdown of cities and limited transportation facilities.
Management warned of potentially y-o-y lower 2HFY20 revenue on disruption to original planned delivery schedules. Our FY20F EPS falls by 13.1% to reflect 1.5-2 months of affected productivity.

Our cross-checks with Valuetronics’ major customers found mixed near-term outlook while secular trends remain intact. Its consumer lifestyle and smart lighting businesses, which formed c.30% and less than 10% of 2QFY20 topline respectively, continue to see tailwinds from increasing market penetration and new product launches at multiple price points.
Covid-19 uncertainty has, however, impacted consumer spending, causing a decline in China online sales for grooming products. For the industrial and commercial electronics (ICE) segment, we believe higher telecommunication and printer demand (c.30% of revenue) could help mitigate some sales weakness in auto (c.20%). Our FY21- 22F EPS cuts are premised on possibly weaker consumer sentiment.

We still like Valuetronics for its robust balance sheet (zero debt with HK$1.03bn cash at end- 2QFY20) and consistent track record of positive free cashflow generation, which could buffer against macro challenges.
We expect Valuetronics to maintain its 25 HKcts DPS over FY20-22F, translating into 7.5% dividend yield. This, coupled with inexpensive valuation of 7.7x FY21F P/E, could also make it an attractive M&A target, in our view.
Total capex for its Vietnam expansion is estimated to be not more than HK$170m, including land use rights. Management does not intend to tap on any borrowings for the Vietnam expansion.

Our EPS cuts result in a lower Target Price of S$0.62, now pegged to 7.5x CY21F P/E (previously 8.5x, 20% discount to sector average), which implies valuation of 0.5 s.d. below its historical mean.
See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
Downside risks: prolonged disruption from Covid-19 outbreak, worsening macro and rising material costs.
New customer or product wins, and better revenue visibilty could re-rate the stock.
Our preferred pick in the sector is Venture Corp (SGX:V03), see report: Venture Corporation - CGS-CIMB 2020-02-27: Anticipating A Stronger 2H.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-10

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.62 DOWN 0.72