Valuetronics - DBS Research 2020-11-12: 1HFY21 Earnings Above Our Expectations; HOLD On To Value

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - 1HFY21 Earnings Above Our Expectations; HOLD On To Value

Valuetronics' 1HFY21 earnings above our expectations, -12.1% y-o-y; declared interim dividend of 5.0 HK cents per share.
1HFY21 revenue fell 19.9% y-o-y on pandemic-related decline in demand.
Revise Valuetronics' FY21/22F earnings forecast by 13%/-8%.

Valuetronics (SGX:BN2)' 1HFY21 net profit was above our expectations, forming 68.2% of our FY21F estimates. The results were better than expected due to
1. a higher revenue mix from its Industrial & Commercial Electronics (“ICE”) segment, which has higher operating margins of c.7-8%, and
2. delay in the impact from its loss of customers due to the US-China trade tensions to FY22F.
Valuetronics' 1HFY21 revenue declined 19.9% y-o-y on the slowdown in demand from customers due to the pandemic. The pandemic had impacted both its Consumer Electronics (“CE”) and ICE segments as demand and consumer spending weakened.
Revenue from its CE segment declined 35.8% y-o-y as the pandemic reduced consumer spending and demand. We believe the impact from the continued diversification of its CE customers also played a part.
Revenue from its ICE segment declined 8.6% y-o-y due to a significant drop in sales to its automotive customers as global vehicle production decreased. Sales from its printer customer and sensing devices customer helped offset some of the impact as the former gained from the increased e-commerce sales while the latter benefitted from the logistics industry.
Interim dividend of 5.0 HK cents per share declared in 1HFY21. This represents a payout ratio of c.24%. Valuetronics declared an interim dividend of 6.0 HK cents per share during the same period last year.

Most of the impact from the loss of customers’ business in the US due to the US-China trade tensions deferred to FY22F. Valuetronics has updated that the US-China trade tensions have caused certain customers to transfer their production for the US end-market to suppliers in the US and ASEAN, and we believe most of the impact will be felt in FY22F. The delay was largely due to movement restrictions and disruptions in supply chains caused by the pandemic.
Expected completion of its Vietnam plant is still at the end of FY22F. The construction of Valuetronics’ Vietnam campus started in July 2020 and its interim 4,000-sqm leased factory has commenced production. This has provided an immediate solution to its customers seeking to diversify their supply chain outside of China.
Valuetronics' interim facility in Vietnam is still small compared to its China or expected completed facility in Vietnam. Its China facility is about 600,000 sqft (approximately 55,742 sqm) while the total factory size of its Vietnam facility when completed is expected to span 550,000 sqft (approximately 51,097 sqm. This is more than 12 times the size of its interim facility and we believe that its current interim facility is not sufficiently large to provide significant impact as an alternative site.

We are revising our Valuetronics's FY21/22F earnings forecast by 13/-8% respectively as we defer the impact from the transfer of its US customers by a year. We originally assumed that the impact would be felt in FY21-22F. However, due to movement restrictions and the disruption in supply chains caused by COVID-19, there has been delay in its customers’ transfer and we have deferred the impact from the transfer to FY22-23F.
Don’t rush – continue to be patient. We believe the uncertainties surrounding Valuetronics' loss of customers’ business in the US and pandemic-impacted demand will continue to put pressure on its share price and earnings in the near term. We think that now is the time to be patient and we are awaiting the turnaround story when its Vietnam campus is completed by end-FY22F and as Valuetronics’ business development efforts begin to bear fruits in the US.

Our target price is pegged to 9.6x (average) (vs 9.4x previously) its 12-month rolling forward PE. Despite its negative outlook, we believe in holding on to Valuetronics given its high cash levels (cash as a percentage of market capitalization is 79%), deep discount to peers, and turnaround story.
See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
Key developments that we are looking out for that would warrant a change in our recommendation include more clarity on the impact of the loss in customers, and stabilisation and improvement of the economic outlook.

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2020-11-12

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