Risks Priced In; Maintain BUY

• Valuetronics’ share price has fallen 10% since late-Apr, in part due to the US-China trade war. Our ROE-g/COE-g methodology suggests the current share price is imputing FY19-22E earnings CAGR of -22 to -29%, which is unlikely to happen as:
  1. VALUETRONICS (SGX:BN2) is keen on expanding its Vietnam capacity to help customers bypass tariffs; and
  2. most customers are stable/experiencing growth.
• FY20-22E dividend yields of 7-8% should provide share price support. We believe earnings growth resumption is a catalyst.
• Maintain BUY with unchanged ROE-g/COE-g Target Price of SGD0.99, based on 2x FY20E P/B.

Scenario Analysis

• In our scenario analysis, we assume an 18% reduction in Valuetronics' FY20E PATMI, factoring in risks of:
  1. slower-than-expected smart-lighting and automotive connectivity modules sales if global consumer sentiment deteriorates significantly;
  2. Valuetronics losing ICE allocation/ customers despite its expansion into Vietnam to insulate itself from the US-China trade war;
  3. gross margin erosion from pricing pressure; and
  4. underestimation of start-up costs in Vietnam.
• Valuetronics's ROE-g/COE-g fair value of SGD0.83 is based on 1.7x FY20E P/B.

Mitigating Factors

• The smart-lighting customer has observed robust growth globally due to broadened offerings, and expects this momentum to continue through the year.
• We believe ICE customers are stickier than CE due to:
  1. stronger design involvement by Valuetronics;
  2. smaller production scale; and
  3. certain products requiring qualification.
• Valuetronics has a strong track record of stable gross margins, and management has guided for this to be stable in the near term.

Compelling Valuations

• If our scenario analysis plays out, Valuetronics’ FY20-22E dividend yield would remain attractive at 5-7% (assuming unchanged 55% payout ratio). And the FY20E EV/EBITDA would still be an attractive 3x vs. 2.7x based on our current forecast. See Valuetronics' dividend history.
• We believe valuation is compelling based on the upside to our Target Price for a company that is expected to sustain its decade long track record of double-digit ROEs during our forecast period.
• In arriving at both the scenario analysis fair value and our Target Price, we used average adjusted FY20-22E ROE instead of average FY20-22E ROE. This is because we believe Valuetronics’s ROEs are depressed due to its massive cash hoard, which accounts for nearly 60% of its market cap.
• Our FY20-22E average adjusted ROE assumes that HKD400m is invested in FY20E, earning 10% ROEs pa. In our view, HKD400m is a reasonable quantum for strategic investments, as it would leave ample room for working capital.
• Similarly, we believe a 10% ROE expectation is conservative and should factor in the timing and return uncertainties of new investments.

Source: Maybank Kim Eng Research - 10 Jun 2019