Valuetronics - RHB Invest 2020-04-15: Benefiting From China’s Recovery; Upgrade To BUY

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Benefiting From China’s Recovery; Upgrade To BUY

Upgrade to BUY from Neutral, new DCF-backed Target Price of SGD0.66 from SGD0.76, 12% upside with c.7% FY20F (Mar) yield.
China is starting to recover from the COVID-19 pandemic, and the lockdown has been lifted in Wuhan, while restrictions in other parts of the country have eased. As of 23 Mar, 80% of Valuetronics (SGX:BN2)'s employees in China have resumed work. With a continuous recovery and as stabilisation improves, the worst may be over for this company.

Valuetronics announced that the reduced production days and the temporary drop in production capacity in February and early March will result in a revenue decline for the six months ending 31 Mar, vs the corresponding period last year. We had expected margins to be impacted as well, and already pared down FY20F estimates in our last report. See Valuetronics - RHB Invest 2020-02-18: Impact Of COVID-19; Downgrade To NEUTRAL.
However, with the global supply chain now affected by the pandemic, and as demand has decreased, we also expect its FY21 performance to be impacted as well. As a result, we lower our FY21F PATMI by 7% to reflect this.
That said, the worst is likely over – unless there is a deterioration in recovery.

With a solid net cash balance sheet and a good track record of rewarding shareholders, we expect Valuetronics to still be able to reward shareholders with attractive dividends despite this crisis, representing a yield of c.7% FY20F. This is despite a likely y-o-y cut in dividend payments, due to the significant correction in its share price from the COVID-19 pandemic.

With 80% of its staff in China back at work as of 12 Mar, coupled with the improving situation in China, we think the worst is over for Valuetronics.
The significant correction over the recent months has reflected the earnings decline, so valuations are now attractive – made more so by its attractive yield and net cash balance sheet. Premised on this, we cut our FY21F PATMI and upgrade our stock rating to BUY, with a lower DCF-backed Target Price of SGD0.66.
See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
Key downside risks are an economic slowdown, FX risks, raw material price fluctuations, and further earnings downside if the trade war or pandemic escalates.