4QFY19 Ahead; Target Price -6% on Higher SG&A Assumptions

• VALUETRONICS HOLDINGS LIMITED (SGX:BN2)'s 4QFY19 core PATMI of HKD45.8m (-2.5% y-o-y) was ahead of our and consensus expectations, as we had overestimated the FY19 impact of reduced smart-lighting allocation.
• We cut FY20-22E EPS by 4-10%, to factor in increased SG&A assumptions. ROE-g/COE-g Target Price falls to SGD0.99, now based on 2x FY20E P/B from 2.1x previously.
• Trading at FY20-22E dividend yields of 7-8% and FY20E EV/EBITDA of 2.7x, valuations appear compelling.
• Maintain BUY.

ICE Still Driving Revenue Growth

• Valuetronics' 4Q19 revenue rose 5% y-o-y, on the back of a 10% increase in ICE sales, largely driven by the printing and automotive businesses.
• CE revenue was flat, as reduced smart-lighting sales were offset by growth in PCBA business. The full impact of reduced smart-lighting allocation is expected in FY20E. However, this has been factored into our forecasts.
• Gross margin rose 1.2ppt to 15.4% amid better product mix.

Finding Refuge in Vietnam

• Valuetronics has not seen any signs its PBCA business will be affected by its customer’s plans to diversify its supply chain from China. Valuetronics’ new Vietnam plant, currently leased, is expected to undergo qualification by a customer in Jun-19, with mass production and shipment to the US from Vietnam to follow after.
• Valuetronics may further expand production capacity in Vietnam by building its own facilities to mitigate impact from the escalating US-China trade tensions.

Compelling Valuation, 7-8% Dividend Yields

• We believe a return to earnings growth in FY21E may be the key catalyst for the stock to re-rate.
• Nearer term, Valuetronics share price should be supported by FY20-22E dividend yields of 7-8%, which is backed by a strong balance sheet (cash to market cap of ~60%, no debt). See Valuetronics' dividend history.
• Despite an increasingly challenging outlook, we believe Valuetronics can still maintain its decade-long streak of double-digit ROE in FY20-22E.
• Risks include:
  1. deterioration in end-market demand;
  2. loss of allocation/ customers despite Valuetronics’ Vietnam expansion; and
  3. higher-than-expected operating costs.

Source: Maybank Kim Eng Research - 30 May 2019