• Valuetronics's FY20 net profit of S$179m (-13.5% y-o-y) was slightly ahead of our/consensus expectations. DPS lowered to 20HKcts, implying 5.3% yield and 49% payout.
• Trade tensions and accelerated supply chain shifts could weigh on FY21F.
• Downgrade from Hold to REDUCE on earnings cuts and few catalysts.
• Valuetronics continues to be cash-generative and has robust net cash of S$0.44/share.

FY20: Valuetronics Slight Beat on Results, But DPS Below Expectations

• Valuetronics (SGX:BN2) reported FY3/20 net profit of HK$178.9m, down 13.5% y-o-y; this formed 108%/ 106% of our/Bloomberg consensus full-year forecasts.
• The slight beat came from tighter cost management and lower tax rate, as topline was marginally below. We saw double-digit revenue decline across both consumer electronics (CE) and industrial and commercial electronics (ICE) segments in FY20, due to broad-based demand slowdown and disruption from Covid-19.
• Valuetronics declared a lower final DPS of 14HKcts, bringing FY20 DPS to 20HKcts. This translates to 5.3% yield and is in line with its dividend policy (49% payout).

Headwinds Ahead

• While production has resumed in its China factories post 1Q20 lockdown, Valuetronics faces heightened trade tensions which could result in accelerated shifts of supply chain out of China. Apart from its smart lighting customer which had relocated some business to its Mexico plant in FY20, we see potential risks from its consumer lifestyle and selected ICE customers (including auto). ICE constitutes 59% of the group’s FY20 revenue, and 41% of sales were delivered to North America which are still subject to tariffs.
• There are some new customers and projects in the pipeline, but have been disrupted by the virus outbreak and could take some time before contributing meaningfully. We note that ICE demand remains resilient, while CE sales have been impacted by global consumer spending.
• We cut our FY21-22F EPS by 3.6-32.4% to reflect potential revenue loss, in line with management’s guidance of a significantly weaker FY21F than FY20.

Vietnam Expansion on Track

• Valuetronics has started the trial production at its second facility in Vietnam (4,000 sqm) in May 2020, following the successful mass production at its first leased site. It expects mass production at its own Vietnam campus to commence in 4QFY3/22, with estimated capex of HK$200m (to be internally funded by cash).
• We think the alternative manufacturing footprint will be beneficial in the longer term to gain new customers.

Downgrade to REDUCE From Hold

• We downgrade Valuetronics from Hold to Reduce on near-term earnings weakness and lack of catalysts. Our Target Price rises to S$0.53 as we peg to a higher P/E multiple of 9x (prev.6.2x), which is at a 25% discount to industry mean.
• Upside risks could come from customer gains and easing trade tensions.
• We see a more attractive entry level for Valuetronics closer to S$0.55, supported by its S$0.44/share net cash (as of end FY20) and implied 6% yield.

Source: CGS-CIMB Research - 4 Jun 2020