Expecting More Challenges in FY21E; Downgrade to HOLD

• Valuetronics (SGX:BN2)’s 2H20 net profit fell 29.1% y-o-y to SGD74.8m due to production and demand disruptions as a result of Covid-19.
• We slash FY21-23E EPS by 16-20% to factor in the challenging outlook, and our ROE-g/COE-g Target Price falls to SGD0.66, now based on 1.2x FY21E P/B (prev: 1.5x).
• Downgrade to HOLD from Buy as risk-reward looks unappealing.

Production and Demand Disruptions Dented 2H20

• Valuetronics's 2H20 revenue fell 29.9% y-o-y to SGD987.3m, as both consumer electronics (CE) and industrial and commercial electronics (ICE) segments faced production disruptions during Feb to Mar-20, and demand shocks from Mar-20 onwards as other countries underwent lockdown as well.
• Gross margin rose 0.2ppt y-o-y to 15.9% as the more profitable ICE segment experienced less revenue decline than CE.

Risk of Further Allocation Losses

• Valuetronics expects some customers, including in auto and CE to switch over to North American suppliers to serve the US allocation in FY21. We estimate this to be around mid-teens percentage of revenue. Some customers are still undecided on whether to remain with Valuetronics or to switch suppliers for the US allocation of their products. As such, we continue to see allocation/ customer losses as a result of US-China tensions as a key risk to our forecasts, notwithstanding the difficult macro-environment.

Vietnam Expansion on Track

• Expansion in Vietnam is progressing to plan. Trial production at its second leased facility has begun in May-20. The new Vietnam campus, which should be completed by 4QFY22, is expected to begin construction soon. Capex for the construction of the Vietnam campus is expected to be around HKD200m.
• Valuetronics's FY20 DPS of HKD0.20 (FY19: HKD0.25) fell short of our expectations, as management sought to conserve cash. As we believe Valuetronics will remain prudent in FY21E, we cut DPS to HKD0.12.

Forecast Changes

• We slash FY21-23E EPS by 16-20% to account for allocation loss as some of Valuetronics’s automotive and consumer electronics customers plan to switch suppliers for the US portion of allocation. We see downside risks to earnings should presently undecided customers choose to switch later on, despite Valuetronics providing alternative manufacturing solutions in Vietnam.
• Despite a difficult FY21E, Valuetronics remains steadfast in leveraging expanding Vietnam footprint as a pillar for long-term growth. In that regard, upside for FY22-23E forecasts could come from new customer wins, as we have not factored any.
• Our ROE-g/COE-g Target Price is based on 1.2x FY21E P/B, in turn based on average adjusted FY21-23E ROE of 12.5% and LTG of 2%. We used average adjusted ROE of in favour of average FY21-23 ROE of 10.9% as we believe that Valuetronics’s ROEs are “under-reflected” due to its massive cash hoard, which accounts for more than 60% of its market cap.
• Our FY21-23E average ROE assumes HKD400m is invested in FY21E, earning 5% ROEs p.a. In our view, HKD400m is a reasonable quantum for strategic investments as it would leave ample room for working capital. Similarly, we believe 5% ROE expectations is conservative and should factor in timing and return uncertainties of new investments.

Source: Maybank Kim Eng Research - 3 Jun 2020