Valuetronics - the Worst Should be Over; U/G to NEUTRAL

Date: 08/06/2022

Source  :  RHB
Stock  :  Valuetronics       Price Target  :  0.53      |      Price Call  :  HOLD
        Last Price  :  0.54      |      Upside/Downside  :  -0.01 (1.85%)

  • Upgrade to NEUTRAL from Sell, with new DCF-backed TP of SGD0.53, 0% downside. Valuetronics endured an expected tough FY22 (Mar), with revenue and PATMI falling 11.1% and 39.3% YoY mainly due to lower contribution from the industrial and commercial electronics (ICE) segment, higher component prices, as well as increased labour and operating costs. Despite these issues persisting, ICE should rebound from newly acquired customers. Hence, we upgrade our call as we think the worst may be over, albeit, headwinds still ahead.
  • Supply issue and high costs to persist. Component supply problem which has resulted in extreme price surges, prolonged order lead times, frequent delivery delinquency, and consequential productivity losses will likely continue to persist. Management guided to continue to proactively mitigate the adverse impact by identifying alternative parts and reengineer products to lower cost while leveraging on the group’s supply chain knowledge to identify new sources of supply. However, GPM will likely continue to remain pressured in the near term.
  • ICE poised for growth but consumer electronics (CE) will likely decline. In FY22, ICE declined mainly due to a significant drop in sales from its automotive customer, which switched its production to another vendor in North America, while component shortages also affected the order fulfilment of certain customers. However, we believe all is not lost going forward as VALUE has been preparing for the trial production for newly acquired customers in this segment including a hardware provider customer for retail chain stores and a customer providing cooling solutions for high performance computing environments. These customers are expected to contribute positively in FY23F. However, the CE segment will likely decline due to lower forecasts from customers and the component shortage issue. All in, we still expect the effect to be a net positive as the ICE segment yields better margins and profitability.
  • Worst should be over – upgrade to NEUTRAL. We expect certain persisting issues like supply chain and component shortages to continue, but, with a higher contribution from the higher margin ICE segment, VALUE’s outlook should be better than FY22. In addition, despite the expected cut in dividend, management is actively doing share buybacks, which would help to support the share price and we believe the group will still reward shareholders with dividends due to the cash per share of SGD0.37 and its positive past track record.
  • ESG. Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% discount or premium to our TP.

Source: RHB Research - 8 Jun 2022

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Valuetronics 0.54 0.00 (0.00%) 135,700 

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