Valuetronics - CGS-CIMB Research 2020-04-01: Cautious Outlook

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Cautious Outlook

Valuetronics (SGX:BN2) turned cautious on disruptions from temporary factory shutdowns at some of its suppliers and end customers; we further trim our FY3/21F EPS.
GFC trough valuations imply more downside, but this could be limited by its net cash of S$0.42/shr (as of end-Sep 19) and 9% dividend yield.
Reiterate HOLD as we await better entry levels.

Faster recovery in China vs. peers could benefit Valuetronics in terms of market share gains.

On 23 Mar, Valuetronics reported that over 80% of its employees in China have resumed work, although the reduction in production days and capacity for the past 1.5 months is likely to result in a y-o-y decline in 2HFY3/20 profitability. Valuetronics further warned that widening virus transmission, travel bans and city lockdowns in its major markets have led to factory shutdowns at some of its suppliers and end customers.
As of 1HFY20, North Asia, US and Europe accounted for 43%, 40% and 17% of Valuetronics’s topline, respectively. We think there could be wider repercussions from global disruption in logistics and sub-component availability, as well as potential slowdown in consumer demand; hence, we lower our FY20F EPS by 20.0%.
Should North Asia recover faster vs. other regions, we see upside to our earnings forecasts as Valuetronics could benefit from market share gains when the pent-up consumer demand returns.

Valuetronics traded at a record low (1 s.d. below historical mean) of 3.3x forward P/E and 0.7x P/BV during the 2008 global financial crisis, which was compounded by its Danshui plant flooding and goodwill impairment due to a poor acquisition.
In the worst-case scenario, those trough valuations imply entry prices of S$0.26 and S$0.35, respectively. Unlike then, the group is arguably on a stronger footing with a c.3x bigger revenue base (FY18-19: > HK$2.8bn), an established track record of profitability and dividend payments as well as a robust net cash position (zero debt).
Valuetronics's net cash per share has grown from FY08’s HK$0.51 to HK$2.36 as of 2Q20 (FY20F: HK$2.50 even after factoring in maintenance capex and Vietnam expansion), representing c.90% of its current market cap.

We believe Valuetronics’s healthy balance sheet, cash-flow generating ability and attractive 9% dividend yield over FY20-22F could limit downside at current price levels.
Reiterate HOLD; our Target Price falls to S$0.50 on EPS cut and pegged to its long-term historical mean of 6.2x CY21F P/E (previously 7.5x, a discount to sector average).
See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
Downside risks include higher material costs and economic uncertainty.
New customer or product wins and better revenue visibility are key re-rating catalysts for the stock.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-01

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.50 DOWN 0.620