Earnings Recovery Delayed: Downgrade to HOLD

• Valuetronics (SGX:BN2)'s 1HFY21 (Apr to Sep 2020) PATMI of HK91.5m (-12.1% y-o-y) was ahead of our and consensus estimates. This was because the allocation switch-overs to other suppliers were disrupted by COVID-19 and are mostly delayed till 2HFY21.
• To account for this, we raise Valuetronics's FY21E EPS by 24% but cut FY22-23E EPS by 14-20%. This should delay earnings recovery, which we believe is a key re-rating catalyst.
• As such we downgrade Valuetronics to HOLD from BUY. We now value Valuetronics on 10x blended FY20-21E P/E from ROE-g/COE-g derived 1.2x FY21E P/B.

Valuetronics's 1HFY21 Weighed by COVID-19 Disruptions

• Valuetronics's 1HFY21 revenue fell 20% y-o-y to HKD1.905b, as COVID-19 weighed on demand for products across consumer electronics (CE, -36% y-o-y) and industrial and commercial electronics (ICE, -8.6%).
• ICE was more resilient due to strength from a printing customer that benefitted from e-commerce, and a sensing devices customer that benefitted from its application in the logistics industry. Gross margin rose 1.9ppt to 17% y-o-y due to a shift in product mix in favour of ICE.

Customer Switch-overs Fully Felt in FY22E

Fairly Valued in the Next 12 Months

• We now peg Valuetronics on 10x blended FY20-21E P/E, near 0.5 SD above its 5-year mean. We believe this is appropriate as risks of allocation losses have diminished significantly than at the start of the US-China trade war in 2018. Yet, this is at a discount to EMS peers like Venture Corp (SGX:V03) (15x FY21E P/E), which is a beneficiary of ongoing supply chain shifts.

Source: Maybank Kim Eng Research - 11 Nov 2020