Valuetronics - Maybank Kim Eng 2020-11-21: Waiting Mode; Maintain HOLD

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Waiting Mode; Maintain HOLD

Plans by certain customers to switch US allocations to other supplies in North America/ ASEAN have been delayed due to COVID-19. This has in turn postponed Valuetronics (SGX:BN2)’s earnings recovery – a key rerating catalyst, in our view.
Maintain HOLD on Valuetronics with target price of S$ 0.58 as we see the stock is fairly valued in the next 12 months.
We prefer Venture Corp (SGX:V03) (BUY, target price S$23.27, see report: Venture Corporation - Maybank Kim Eng 2020-11-21: Earnings Inflection; Maintain BUY) as we believe it is at the cusp of an earnings upgrade cycle.

Disruptions caused by COVID-19 have delayed automotive and PCBA customers’ plans to switch US allocations to other suppliers from Valuetronics from 1HFY21 to 2HFY21. As such, the full effect of the allocation losses would not be felt until FY22E, which will in turn delay earnings recovery.
In our view, visible signs of earnings recovery is a key rerating catalyst, as these are indicators that present headwinds have passed. Valuetronics expects prospects beyond FY21 to be highly uncertain, due to COVID-19 and US-China trade tensions.

We forecast Valuetronics's earnings to bottom in FY22E before growth resumes in FY23E. We expect construction of the Vietnam plant to be completed in CY22. Valuetronics sees this plant as a long-term growth driver.
Valuetronics has been expeditiously expanding its Vietnam capacity to cater to the needs of customers who want to diversify production to Vietnam from China. However, we believe the slope of Valuetronics’s recovery will be uncertain, as this depends on winning new customers to rebuild its revenue base, and the profile of projects secured.

We believe Valuetronics is fairly valued in the next 12 months based on its earnings trajectory. We applied 10x blended FY21-22E P/E to Valuetronics, or nearly 0.5 SD above its 5-year mean. We believe this is appropriate as risks of further allocation losses are a lot lower than three years ago when the US-China trade war first began.
Yet, this is at a discount vs peers like Venture Corp (SGX:V03) (15x) and Hi-P International (SGX:H17) (12x), which have either gained or maintained allocations.
See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
Key risk to our earnings is further allocation loss if currently undecided customers choose to switch away from Valuetronics.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-11-21

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.580 SAME 0.580