Valuetronics - UOB Kay Hian 2020-06-04: FY20 Results In Line But Challenging Outlook; Downgrade To SELL

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VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - FY20 Results In Line But Challenging Outlook; Downgrade To SELL

• Valuetronics's FY20 net profit was in line, forming 102% of our expectation. While the capacity disruption from COVID-19 eased in Mar 20, a significant portion of Valuetronics’s customers in the US are relocating their production outside of China to minimise the impact from the US-China trade war.
• Valuetronics expects a significant drop in net profit for FY21. We cut our FY21 EPS by 29% to account for the loss of customers and slower demand, and slash our target price by 35% to S$0.55.
• Downgrade to SELL.

Valuetronics' FY20 Results in line with expectations.

• Valuetronics (SGX:BN2)’s FY20 net profit of HK$178.9m (-10.3% y-o-y) came in largely within expectations, forming 102% of our full-year earnings forecast. See Valuetronics Announcements.
• Revenue fell 16.8% y-o-y to HK$2,354.3m in FY20, as sales from the industrial and commercial electronics segment and commercial electronics segment fell by 13.7% y-o-y and 21.1% y-o-y respectively, resulting from slower demand from customers.
• On a more positive note, gross margin improved 0.2ppt to 15.4% in FY20 on the back of an improvement in product mix.

COVID-19 outbreak to weigh on demand.

• While Valuetronics's China operations started to gradually normalise in mid-Mar 20, the group experienced a slowdown in sales from customers. This was the result of the temporary shutdown of operations by certain customers in Europe and North America in response to the mandatory social and economic “lockdowns” instituted by the respective governments. As such, management shared that this had created an adverse demand-side shock which affected orders across all segments since Mar 20.
• Furthermore, management shared that order visibility had become more limited and less firm given the current circumstances.

Challenging outlook further exacerbated by continued US-China trade tensions.

• Although the Phase One trade deal was signed between China and the US in January 2020, management noted that the majority of its customers’ shipments from China to the US are still subject to tariffs ranging from 7.5% to 25%.
• Valuetronics has started to experience the impact from its customers’ accelerated diversified procurement strategies outside of China; while several customers have indicated interest in diversifying production to Valuetronics's new Vietnam plant, some customers in the automotive and CE segments have plans to switch to other suppliers in North America to serve the US market.

Significant negative impact to earnings from customers’ accelerated roll-out of strategies to diversify procurements outside of China.

• Valuetronics’s exposure to the US market is significant with 39% of the group’s revenue contributed by shipments to the US in FY20. We understand that close to one-third of this is more vulnerable to the continued trade tensions and customers are more likely to switch suppliers. Its key customers in the auto industry have made the decision to switch to other suppliers in North America and we estimate that historically, the total revenue from auto customers contributes to roughly 15-20% of the group’s revenue.
• Also, the increase/shift in revenue from shipments to Indonesia in FY20 (7% of revenue), which came on the back of one of its key customers relocating an assembly facility to Indonesia, may not be sustainable going forward.

Earnings Revision

• We reduce our Valuetronics's FY21 and FY22 net profit forecasts by 29.2% and 27.2% respectively as we reduce our revenue forecasts by 24.7% and 23.6% respectively to account for the slower demand from the COVID-19 outbreak as well as the loss of revenue from customers that are switching suppliers to other markets. We also introduce 2023 earnings forecast of HK$141m.

Downgrade Valuetronics to SELL

• Downgrade Valuetronics to SELL with a lower target price of S$0.55 (previously S$0.85), pegged to peers’ average of 10.9x PE for FY21F.
• See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
• Share price catalysts:
  • Additional customers in the IoT and automobile space.
  • Higher-than-expected dividends.
  • Potential M&As.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-06-04

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