Valuetronics - UOB Kay Hian 2020-11-12: 1HFY21 Results Above Expectations; Upgrade To HOLD

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VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - 1HFY21 Results Above Expectations; Upgrade To HOLD

• Valuetronics's 1HFY21 net profit was above expectations, forming 73% of our full-year estimate. That said, we expect a challenging outlook in FY22 as a significant portion of its customers is switching to suppliers outside of China to minimise the impact of the trade tariffs.
• While we raise our Valuetronics's FY21F earning forecast by 27% to account for the better-than-expected results, we lower our FY22F earnings forecast by 4% to factor in the loss of customers and slower demand.
• Upgrade Valuetronics to HOLD but maintain target price of S$0.55.
• Suggest entry price: S$0.50.

Valuetronics's 1HFY21 results ahead of expectations.

• Valuetronics (SGX:BN2)’s 1HFY20 net profit of HK$91.5m (-12.1% y-o-y) came in above expectations, forming 73% of our full-year estimate. This came mainly as a customer’s plans to switch suppliers (highlighted in FY20) has mostly been deferred to FY22.
• Valuetronics's total revenue fell 19.9% y-o-y in 1HFY21 as sales from the industrial and commercial electronics (ICE) and commercial electronics (CE) segments fell 8.6% y-o-y and 35.5% y-o-y respectively due to slower demand.

Gross margin improved.

• The ICE segment, which commands higher margins, made up 66.7% of Valuetronics's total revenue (1HFY20: 58.4%). With the change in product mix, gross margin rose 1.2ppt y-o-y to 17%. Furthermore, selling & distribution expense declined 9.7% y-o-y and administrative expense fell 8.7% y-o-y. Overall net margin rose 0.8ppt y-o-y to 8.4%, partially mitigating the decline in revenue.

Significant negative impact to earnings from customer’s accelerated diversified procurement strategy outside of China.

• Valuetronics’s exposure to the US market is a significant 41.8% of 1HFY21 group revenue (based on shipments to the US) where the majority of the customers are subjected to trade tariffs of 5-25%. Its key customers in the automobile industry, which mainly serves the US market, have switched to other suppliers in North America. We estimate that historically, total revenue from its automobile customers contributed 15-20% of group revenue.
• Furthermore, one of its clients in the CE segment has plans to switch to other local suppliers in Indonesia as it relocates its assembly facility to the country. Based on Valuetronics’s end market shipment data in FY20, we estimate this could affect 7% of group revenue.

Impact of customers switching suppliers to be more significant in FY22.

• The switch by customers to other suppliers is expected to be completed in FY21. Valuetronics expects the negative impact to be reflected in FY22. Our FY22 net profit forecast accounts for a 22% y-o-y decline in group revenue to factor in reduced sales from these customers.

Construction of Vietnam campus on track.

• Construction of Valuetronics’s campus (within miles of the current leased factory) has started in Jul 20. Phase 3 of the construction is expected to be completed in end-FY22. Management said that a few of the group’s customers are in different stages of production transfer from Valuetronics’s China site to the Vietnam site.

Upgrade Valuetronics to HOLD

• We raise our Valuetronics's FY21 net profit forecast by 27% to account for the stronger-than-expected 1HFY21 earnings. We lift our revenue and margin assumptions, mainly as the customer’s plans to switch supplier (highlighted in FY20) has mostly been deferred to FY22 partly due to COVID-19.
• We lower our Valuetronics's net profit forecasts by 4.4% and 4.2% for FY22 and FY23 respectively to account for the deferment of loss of revenue from customers who are switching suppliers to other markets.
• Upgrade Valuetronics to HOLD but maintain target price of S$0.55, pegged to peers’ average of 10.9x FY22F PE as we roll forward our valuation base to FY22. Our upgrade comes as Valuetronics's share price has declined 11% since the start of Jun 20.
• See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
• Suggest entry price is S$0.50.
• Valuetronics Share Price catalyst:
  • 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/ 2020-11-12

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