VALUETRONICS HOLDINGS LIMITED (SGX:BN2)
Valuetronics - Earnings Recovery Delayed; Downgrade To HOLD
Earnings recovery delayed: Downgrade to HOLD
- Valuetronics (SGX:BN2)'s 1HFY21 (Apr to Sep 2020) PATMI of HK91.5m (-12.1% y-o-y) was ahead of our and consensus estimates. This was because the allocation switch-overs to other suppliers were disrupted by COVID-19 and are mostly delayed till 2HFY21.
- To account for this, we raise Valuetronics's FY21E EPS by 24% but cut FY22-23E EPS by 14-20%. This should delay earnings recovery, which we believe is a key re-rating catalyst.
- As such we downgrade Valuetronics to HOLD from BUY. We now value Valuetronics on 10x blended FY20-21E P/E from ROE-g/COE-g derived 1.2x FY21E P/B.
Valuetronics's 1HFY21 weighed by COVID-19 disruptions
- Valuetronics's 1HFY21 revenue fell 20% y-o-y to HKD1.905b, as COVID-19 weighed on demand for products across consumer electronics (CE, -36% y-o-y) and industrial and commercial electronics (ICE, -8.6%).
- ICE was more resilient due to strength from a printing customer that benefitted from e-commerce, and a sensing devices customer that benefitted from its application in the logistics industry. Gross margin rose 1.9ppt to 17% y-o-y due to a shift in product mix in favour of ICE.
Customer switch-overs fully felt in FY22E
- In Vietnam, Valuetronics has commenced production in its 4,000 sqm leased factory, and construction for the new manufacturing campus has begun - according to plan.
- COVID-19 has disrupted and delayed the plans of customers that are planning to relocate the US-allocation of their products away from Valuetronics to other North America/ASEAN suppliers. As such, the full effects of the allocation loss will only be felt in FY22E. There remain some customers which are on the fence on whether to switch away from Valuetronics. This is a key risk to FY22-23E earnings, in our view.
Fairly valued in the next 12 months
- We now peg Valuetronics on 10x blended FY20-21E P/E, near 0.5 SD above its 5-year mean. We believe this is appropriate as risks of allocation losses have diminished significantly than at the start of the US-China trade war in 2018. Yet, this is at a discount to EMS peers like Venture Corp (SGX:V03) (15x FY21E P/E), which is a beneficiary of ongoing supply chain shifts.
- See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2020-11-11
SGX Stock
Analyst Report
0.58
DOWN
0.660
