Valuetronics - Pain Before Gain; D/G to SELL

Date: 03/03/2022

Source  :  RHB
Stock  :  Valuetronics       Price Target  :  0.50      |      Price Call  :  SELL
        Last Price  :  0.54      |      Upside/Downside  :  -0.04 (7.41%)

  • Downgrade to SELL (from Buy) with new SGD0.50 TP from SGD0.66, 15% downside. Valuetronics guided FY21F earnings will be significantly lower compared to FY20 and highlighted that some of its customers in the auto and consumer electronics segments are planning to switch over to other suppliers in North America to serve the US market in FY21. We cut our FY21F EPS by 14% to reflect the lower revenue expected.
  • Losing customers due to diversification. With the conflict between the US and China over the origins of COVID-19 fanning broader tensions on trade and technology, the Trump Administration continues to push US companies to move their supply chains out of China. Clients of Valuetronics have also signalled to diversify their production out of the group’s China factories, with some having already diversified to its Vietnam factory. However, several clients in the auto and consumer electronics segments are planning to switch over to other suppliers in North America to serve the US market in FY21 (Mar). In FY20, c.39% of the group’s revenue was shipped to the US. As a result, we expect revenue to drop by 20% in FY21F across both segments.
  • Dividends likely to be cut. With the tough times ahead, we expect management to conserve its cash pile and as such, it will likely cut dividends especially when earnings are likely to be weaker. As a result, we expect a 5% yield for FY21F
  • Vietnam expansion in line. Valuetronics’ expansion to Vietnam has progressed as planned. Following the commencement of mass production in Jun 2019 at the first leased manufacturing facility in Hanoi, it successfully launched the trial production in its second facility located at a 4,000 sqm leased standard factory in May 2020. In Nov 2019, it 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 the group’s own Vietnam campus, which is expected to commence mass production by 4QFY22. Capex for the construction of the Vietnam campus is estimated at HKD200m and will be financed using internal cash resources.
  • Key downside risks are an economic slowdown, FX risks, raw material price fluctuations, and further earnings downside if the trade war or pandemic escalates.

Source: RHB Securities Research - 5 Jun 2020

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Valuetronics 0.54 0.00 (0.00%) 135,700 

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