• Valuetronics' FY19 core PATMI of HK$207m (+2.9% y-o-y) met our/consensus expectations.
• We expect sales decline in FY20F from potential order loss and lack of sizeable new models in the pipeline. This led to our 14.6-17.4% EPS cuts.
• Maintain HOLD with 7% yield and cheap valuation of 3.2x ex-cash FY20F P/E.

4Q19 in Line; FY19 Core PATMI +2.9% Y-o-y

• VALUETRONICS HOLDINGS LIMITED (SGX:BN2) reported 4QFY19 core PATMI of HK$43m (-2.1% y-o-y), which formed 20%/21% of our/consensus full-year forecasts as it is a seasonally weaker quarter.
• Excluding a HK$13.6m impairment loss from Danshui flooding and some FX gains, FY19 core PATMI would have been HK$207m (+2.9% y-o-y), accounting for 98%/102% of our/consensus full-year numbers. This came on the back of a flattish topline (-0.9% y-o-y), gross margin expansion (FY19: 15.2%, FY18: 14.5%) from favourable sales mix, and higher opex.

FY20F Shrouded in Sales Uncertainty

• Inventory destocking issues and demand slowdown from its smart lighting customer have led to FY19’s 16.9% y-o-y sales decline in consumer electronics (CE), which we expect to remain under pressure going forward as 10% of total sales is at risk of displacement due to customer’s reconfiguration of supply chain.
• While the industrial and commercial electronics (ICE) segment grew 14.6% y-o-y, underpinned by higher demand from printer, auto and sensing devices, the lack of sizeable new models and a high FY19 base would mean more moderate topline growth in FY20-21F.

Alternative Footprint in Vietnam

• Against the backdrop of rising trade tensions, Valuetronics has identified a leased site in Vietnam as an alternative manufacturing site, which one of its ICE customers is expected to qualify by end Jun 19 and commence mass production for shipment. Should more clients decide to de-risk out of China, Valuetronics does not rule out establishing its own facility in Vietnam.
• We see no financing issue given its HK$930m cash pile (as of end-Mar 19), which makes up 60% of its market cap. Valuetronics continues to explore M&As in North America.

Maintain HOLD, Supported by 7% Yield and HK$930m Net Cash

• Valuetronics declared final DPS of 20 HKcts, bringing FY19 DPS to 25 HKcts (FY18: 27 HKcts), which translates to 54% payout ratio and 7% dividend yield at current share price level. See Valuetronics' dividend history.
• We cut our FY20-21F EPS by 14.6-17.4% on lower sales assumptions, and our target price falls to S$0.63, which is now pegged to 8x CY20F P/E (20% discount to industry average), vs 8.5x previously.
• Our HOLD call is unchanged given its strong balance sheet, attractive yield and valuation of 8.5x FY20F P/E (1.9x FY20F EV/EBITDA).
• Upside/ downside risks: tariffs and customers’ orders.

Source: CGS-CIMB Research - 30 May 2019