Most Risks Appear Priced In; BUY

• We cut FY20-22E earnings by 2-23% as we factor in additional supply chain issues in FY20E, and demand uncertainty in FY21E.
• While we see risks to our forecasts amid poor visibility, we believe most risks are priced in as Valuetronics (SGX:BN2) is trading at only 1.2x FY20E ex-cash P/E (near 1SD below long-term mean), not far from crisis valuations during the GFC and 2013 of -0.4x and -0.2x respectively.
• Our ROE-g/COE-g Target Price falls to SGD0.82 as we roll forward to 1.5x FY21E P/B from 1.9x FY20E. BUY.

Visibility Is Increasingly Murky

• Valuetronics updated that as at 23-Mar, 80% of its employees in China has resumed work. However, Valuetronics expects business sentiment to be uncertain in major markets such as US, Europe and China.
• Valuetronics noted that since last week, some suppliers and end-customers in various countries have temporarily shut down to halt the spread of Covid-19. We note that customers are beginning to turn cautious. For instance, Valuetronics’s automotive customer has withdrawn its guidance amid increasing supply-chain and end-demand uncertainties on 20-Mar.

But Strong Balance Sheet Helps Fund 8% Yield…

• While Valuetronics has the balance sheet means to maintain HKD0.25 DPS in FY20-21, we factored a lower HKD0.22-0.23, pegged to 63% pay-out ratio, which is the FY16 high. Valuetronics expects its Vietnam expansion plans to be fully funded via cash.
• Customers’ liquidity, leverage and coverage ratios also appear healthy. On 20-Mar, its automotive customer withdrew the remaining USD1.4b of its revolving credit facility to boost liquidity levels amid current uncertainties.

While Ex-cash P/E Is Near Crisis Valuations

• Valuetronics is currently trading on 8% FY20E dividend yield, around its long-term mean. For comparison, yield peaked at around 17% during the GFC.
• Valuetronics is currently trading at 1.1x FY20E ex-cash P/E, near 1SD below its long-term mean. Click view full report button below to see peer comparison table. Through its listing history, forward ex-cash P/E has only been negative twice, during GFC (trough: -0.4x) and in 2013 when Valuetronics was turning around from a difficult year which was further weighed by non-recurring costs of terminating a licensing business (-0.2x).

Source: Maybank Kim Eng Research - 29 Mar 2020