Valuetronics - CGS-CIMB Research 2021-05-31: Not Out Of The Woods Yet

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VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Valuetronics - Not Out Of The Woods Yet

• Valuetronics's FY21 net profit of HK$187m (+4.6% y-o-y) beat our/ consensus’s estimates due to greater ICE demand in 2HFY21 and higher dividend of HK$0.21.
• The Vietnam campus is on track for completion by end-FY22F to provide an alternative production site for current and prospective new customers.
• Reiterate REDUCE on Valuetronics, with a ~4.0% dividend yield and ~3.0x ex-cash FY23F P/E.

Valuetronics' FY21 results and DPS above expectations

• Key surprises from Valuetronics (SGX:BN2)’s FY21 results are better-than-expected performance from management’s previous guidance for a weaker year vs FY20, and higher dividends declared of HK$0.21. Net profit of HK$187.1m (+4.6% y-o-y) beat our/ consensus expectations, forming 129%/117% of FY21F.
• The beat came from
  1. stronger customer demand in 2HFY21,
  2. higher sales mix in industrial and commercial electronics (ICE) segment (+11.3% y-o-y) which commanded better OPMs that helped offset the decline in its consumer electronics (CE) segment (-25.7% y-o-y), and
  3. delays in the switchover to another vendor by its automotive customer due to COVID-19.

Strong balance sheet to withstand headwinds ahead

• While Valuetronics’s FY21 results beat expectations, we do not expect this to continue in FY22F. We expect FY22F to remain challenging given
  1. exit of its automotive customer,
  2. rising component prices amid a global shortage, and
  3. ongoing macro uncertainties causing a lack of earnings visibility.
• We cut our Valuetronics's FY22F-23F earnings per share forecast by 11-19% to reflect potential revenue loss and higher raw material costs, in line with management’s guidance of a significantly weaker FY22F than FY21. Valuetronics has zero debt and a strong net cash position of HK$1.1bn at end-Mar 21, forming ~70% of its market capitalisation.

Vietnam campus targeted to be completed by end-FY22

• Valuetronics’s Vietnam campus (52,541 sq m) is on track for completion by end-FY22F barring unforeseen circumstances. While Valuetronics is in talks with current and prospective customers to start production in its Vietnam facility, not much has been formalised yet.
• We believe that Vietnam positions Valuetronics as a regional player and offers customers an alternative site in order to diversify supply chain risks to meet their global manufacturing requirements. In our view, we think the completion of its Vietnam campus by end-FY22F, would allow Valuetronics to secure new customers to be a long-term growth driver.

Reiterate REDUCE on Valuetronics with a lower target price of $0.50

• We keep our REDUCE call on Valuetronics against the backdrop of a challenging operating environment in FY22F. We roll over our valuation to FY23F and our target price for Valuetronics falls to S$0.50, now pegged to ~10x P/E (3-year historical average).
• Valuetronics’s strong net cash position of S$0.44/share (end-FY21) should help the group cushion tailwinds ahead, in our view.
• See
  • Valuetronics's Share Price,
  • Valuetronics's Target Price,
  • Valuetronics's Analyst Reports,
  • Valuetronics's Dividend History,
  • Valuetronics's Announcements,
  • Valuetronics's Latest News.
• Upside risks: new customer wins.
• Downside risks: deteriorating economic conditions.

Darren ONG CGS-CIMB Research | William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-31

SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 0.504 DOWN 0.530