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


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.

Cautious tone on near-term outlook

  • 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.

GFC trough valuations below S$0.42/shr cash level

  • 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.

Await a lower entry level; reiterate HOLD

NGOH Yi Sin CGS-CIMB Research | 2020-04-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.50 DOWN 0.620