• Valuetronics' 1QFY20 results were in line. Core net profit (-3.1% y-o-y) met 27% of our and consensus forecast. Revenue fell 7.1% y-o-y, stemming from declines in both the ICE (-5.3% y-o-y) and CE segments (-9.9% y-o-y). However, gross margin rose 0.5ppt.
• Valuetronics started mass production on a leased site in Vietnam since Jun 19. It intends to acquire a plot of land in Vietnam to build its own manufacturing campus.
• Maintain BUY and target price of S$0.80, pegged at peers’ average of 11x PE for FY20.

1qfy20 Results

Results in line.

• VALUETRONICS HOLDINGS LIMITED (SGX:BN2)’s 1QFY20 core net profit (-3.1% y-o-y) was in line with expectations. Revenue for the industrial and commercial electronics (ICE) and consumer electronics (CE) segments declined 5.3% y-o-y and 9.9% y-o-y respectively due to weaker demand amid an uncertain macro environment. As a result, total revenue fell 7.1% y-o-y in 1QFY20.
• However, gross margin rose 0.5ppt y-o-y to 15.1%, thanks to increased contribution from the higher-margin ICE segment which made up 63.2% of total revenue in 1QFY20 (1QFY19: 62.0%). In addition, Valuetronics also enjoy better efficiencies.

1-year stock price correction of 15% and ex-cash PE of 2.6x for FY20 have more than priced in a weaker FY20.

• We believe our forecast of a 10% decline in EPS for FY20 has sufficiently captured the headwinds facing Valuetronics. We expect CE revenue to decline 22% y-o-y, and ICE revenue to decline marginally for FY20.
• More importantly, balance-sheet strength has improved significantly, with net cash of HK$1,032m (S$186m) as of 1QFY20, up from HK$757m in 1QFY19, equivalent to 69% of Valuetronics’ market cap.

Efforts to diversify manufacturing footprint progressing well, with plans for further expansion.

• Valuetronics’ leased site in Vietnam has been qualified by the customer and mass production has commenced since Jun 19 with shipments from Vietnam to the US. Valuetronics also plans to increase its capacity by leasing more space in the near to medium term.
• As more customers deploy diversified procurement strategies in the face of uncertainties from trade tensions between US and China, Valuetronics intends to acquire a plot of land in Vietnam (located in an industrial park) to build its own manufacturing campus, thus providing a good alternative solution to customers impacted by the trade war.

Stock Impact

Outlook for ICE is neutral to slightly negative.

• Valuetronics is neutral to slightly negative towards its ICE segment. Its sub-segments include automobile and printer customers.

Expect slower demand for CE.

• On the other hand, Valuetronics expects demand for smart lighting products to continue to weaken in the near term, which contributed around 10% of FY19 revenue.

Increasing cash hoard.

• Valuetronics has a huge warchest of HK$1,032m (S$186m), equivalent to 69% of its market cap.

Earnings Revision / Risk

• We maintain our earnings estimates.
• Key risks include higher-than-expected loss of business due to the trade war and higher-than-expected revenue decline in the CE and ICE segments.

Valuation / Recommendation

• Maintain BUY and PE-based target price of S$0.80, pegged to peers’ average of 11x PE for FY20.

Share Price Catalyst

• Additional customers in the IoT and automobile space.
• Higher-than-expected dividends.
• Potential M&As.

Source: UOB Kay Hian Research - 16 Aug 2019