• Upgrade to BUY from Neutral, new DCF-based Target Price of SGD0.81 from SGD0.61, 11% upside.
• VALUETRONICS (SGX:BN2)'s 2QFY20 (Mar) PATMI of HKD56m (+26.3% y-o-y) outperformed our estimate.
• As trade war-related tariffs may be removed in phases, and as Valuetronics secures new customers in the communications sector, there should be some positive earnings upside ahead. As such, we lift FY20F-21F earnings by 11% and 7%, resulting in a higher Target Price.

Trade War Caused Customers to Shift Production Away From China

• Management notes that the ongoing trade war has caused some of its customers to plan to shift their production away from China, while others have already moved (with Valuetronics) to Vietnam. However, management sees that its customers’ production is more stable than expected. As such, it expects the consumer electronics (CE) division to grow, as most of the US smart lighting business has already been phased out.

New Products and Orders From Customers Secured

• Management highlighted that it has secured some new products and new orders from existing and new customers in the industrial and commercial electronics (ICE) segment. That should help improve the projected weak numbers from ICE that it forecasted earlier in 1QFY20F.
• As a result, we expect a smaller revenue decline of between 5-7% y-o-y, from 10-15% previously.

Brighter Outlook; Upgrade to BUY

• Our upgrade is premised on its better-than-expected earnings, and improved outlook.
• Net cash is now at 67% of market cap. Management is keen to continue rewarding shareholders with respectable dividends, due to its strong net cash position and cash flow generation. We expect a yield of 5.9% at current share price levels for FY20F.
• M&A is also a possibility, as management is exploring opportunities to deploy cash to yield-accretive targets with synergistic businesses.
• Key downside risks are an economic slowdown, FX risks, raw material price fluctuations and further earnings downside if the trade war escalates.

Source: RHB Invest Research - 14 Nov 2019