Valuetronics - RHB Invest 2020-11-12: Tough Outlook Ahead; Maintain SELL


Valuetronics - Tough Outlook Ahead; Maintain SELL

  • As some customers in the automotive industry and consumer electronics (CE) segment continue their planned transfer of production for the US end-market from China to North America and ASEAN, the switchover by some of Valuetronics (SGX:BN2)'s customers to other suppliers in these regions is expected to impact Valuetronics negatively in FY22F (Mar).
  • Maintain SELL on Valuetronics and DCF-derived target price of S$0.50, 12% downside, as we believe profitability will be severely impacted with no upside catalysts in the near term.

Losing customers due to diversification.

  • Valuetronics’ clients have signalled an intention to diversify production out of its China factories, while some have diversified to its Vietnam operations. This stemmed from the conflict between the US and China over the origins of the pandemic fanning broader tensions on trade and technology, and the Trump Administration’s continuous push for US companies to move their supply chain out of China.
  • However, several companies in the automotive industry and CE segment have plans to switch over to other suppliers in North America and ASEAN to serve the US market.
  • In FY20, c.39% of Valuetronics’s revenue was shipped to the US. The switchover is expected to be completed by end-FY21F, with the negative impact seen in FY22F. As a result, we expect Valuetronics's revenue to drop by 25% in FY22F across both segments.

Vietnam expansion in line.

  • Valuetronics’ expansion into Vietnam has progressed as planned. Following the commencement of mass production in Jun 2019 at the first leased manufacturing facility in Hanoi, the group successfully launched trial production at its second facility, located at a 4,000 sqm-leased standard factory in May 2020 – it has since commenced production.
  • 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 its own Vietnam campus, which is expected to commence mass production by 4QFY22.
  • Capex for the construction of Vietnam campus is estimated to be around HK200m and will be financed through internal cash resources.

Dividend cut imminent. Maintain SELL on Valuetronics.

Jarick Seet RHB Securities Research | 2020-11-12
SGX Stock Analyst Report SELL MAINTAIN SELL 0.500 SAME 0.500