Valuetronics - RHB Invest 2020-06-05: Pain Before Gain; Downgrade To SELL

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Pain Before Gain; Downgrade To SELL

Valuetronics (SGX:BN2) guided FY21F earnings will be significantly lower compared to FY20 and highlighted that some of its customers in the auto and consumer electronics segments are planning to switch over to other suppliers in North America to serve the US market in FY21.
We cut our FY21F EPS by 14% to reflect the lower revenue expected.
Downgrade to SELL (from Buy) with new SGD0.50 Target Price from SGD0.66, 15% downside.

With the conflict between the US and China over the origins of COVID-19 fanning broader tensions on trade and technology, the Trump Administration continues to push US companies to move their supply chains out of China. Clients of Valuetronics have also signalled to diversify their production out of the group’s China factories, with some having already diversified to its Vietnam factory. However, several clients in the auto and consumer electronics segments are planning to switch over to other suppliers in North America to serve the US market in FY21 (Mar).
In FY20, c.39% of Valuetronics’s revenue was shipped to the US. As a result, we expect revenue to drop by 20% in FY21F across both segments.

With the tough times ahead, we expect management to conserve its cash pile and as such, it will likely cut dividends especially when earnings are likely to be weaker. As a result, we expect a 5% yield for FY21F. See Valuetronics Dividend History.

Valuetronics’ expansion to Vietnam has progressed as planned. Following the commencement of mass production in Jun 2019 at the first leased manufacturing facility in Hanoi, it successfully launched the trial production in its second facility located at a 4,000 sqm leased standard factory in May 2020.
In Nov 2019, Valuetronics also signed a sub-lease agreement to acquire a 52,541 sqm piece of land in an industrial park – run by a Japanese group – for the development of the group’s own Vietnam campus, which is expected to commence mass production by 4QFY22.
Capex for the construction of the Vietnam campus is estimated at HKD200m and will be financed using internal cash resources.

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.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2020-06-05

SGX Stock Analyst Report BUY MAINTAIN BUY 0.660 SAME 0.660