Valuetronics - UOB Kay Hian 2021-06-01: FY21 Above Expectations; Outlook Remains Challenging


Valuetronics - FY21 Above Expectations; Outlook Remains Challenging

  • Valuetronics's FY21 net profit of HK$187.1m (+4.6% y-o-y) was above our expectations, forming 117% of our full-year earnings estimate, largely due to better-than-expected revenue in 2HFY21. But we expect a challenging outlook as the impact of customers switching to suppliers outside China is expected to be more substantial in FY22.
  • Furthermore, the global component shortage may hurt margins and affect v’s ability to meet orders.
  • Maintain HOLD with a higher target price of S$0.66 (12x FY22F PE).

Valuetronics FY21 results ahead of expectations.

  • Valuetronics (SGX:BN2)’s FY21 net profit of HK$187.1m (+4.6% y-o-y) came in above expectations, forming 117% of our full-year earnings forecast. The outperformance was largely due to higher-than-expected revenue in 2HFY21.

Better-than-expected revenue for ICE segment partly due to delay in customer switching supplier.

  • Revenue for the full year was stable at -3.1% y-o-y as sales in 2HFY20 rose 20% y-o-y, largely due to an unexpected rebound in consumer demand. Revenue from the industrial and commercial electronics (ICE) segment increased 11.3% y-o-y to HK$1,601m on the back of a surge in demand from logistics and e-commerce which benefitted key customers.
  • More importantly, the COVID-19 pandemic caused a delay in the schedule of an automobile industry customer’s production switch-over to another vendor in North America. This led to continued orders from that customer in FY21, which will not be repeated in FY22.
  • On the consumer electronic (CE) front, a key customer experiencing weak demand and the customer’s production switch-over to another vendor in ASEAN led to 25.7% drop in sales for the segment.

Improvement in gross margin.

  • The ICE segment which commands a higher margin contributed 70.2% of revenue in FY21, up from 61.1% in FY20. As a result of the change in the product mix, gross margin rose 1.5ppt to 16.9%.
  • Overall, net margin was up 0.6ppt to 8.2% in FY21, mitigating the decline in revenue.
  • Valuetronics has recommended a final dividend of 16 HK cents/share. This brings Valuetronics's FY21 full-year dividend to 21 HK cents/share (FY20: 20 HK cents/share), or dividend payout of 48%.

Significant negative impact on earnings from customers’ accelerated diversified procurement strategy outside China.

  • Valuetronics’s exposure to the US market is significant with 42.3% of the group’s revenue in FY21 contributed by shipments to the US. These customers are largely affected by trade tariffs (5-25%). Its key customers in the automobile industry – which mainly serves the US market - have made the decision to switch to suppliers in North America.
  • We estimate that historically the total revenue from automobile customers contributed about 15-20% of Valuetronics’s revenue. Furthermore, as seen in the FY21 results, Valuetronics was affected by a key customer in the CE segment who planned to switch to local suppliers in Indonesia as it relocated its assembly facility to the country.

Challenging outlook from customers switching suppliers and supply chain issues.

  • The switching over by Valuetronics’s automobile customers to other suppliers was substantially completed in 4QFY21. As such, the group expects the negative impact from this switchover to be reflected more significantly in FY22. Our FY22 earnings forecast account for a 21% y-o-y decline in revenue to factor in the reduced sales from these customers.
  • Furthermore, Valuetronics – like most manufacturers – is facing a global component shortage issue which may affect the group’s ability to meet orders. For these reasons, Valuetronics expects financial results for FY22 to be significantly lower compared with FY21.

Construction of Vietnam campus on track.

  • Valuetronics’s Vietnam campus remains on track for commencement of mass production by 4QFY22. In May 21, the Vietnamese government tightened quarantine rules and social distancing measures in response to the rising COVID-19 cases in the country. Unless the situation in Vietnam continues to deteriorate, the group does not expect significant impact on the production commencement date.

Maintain HOLD with a higher target price

Share price catalyst

  • Additional customers in the IoT and automobile space.
  • Higher-than-expected dividends and potential M&As.

John Cheong UOB Kay Hian Research | 2021-06-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.66 UP 0.550