1HFY22 Missed on Cost Pressures

• Valuetronics (SGX:BN2)'s 1HFY22 PATMI of HKD56.6m (-38.1% y-o-y) missed, accounting for only 39%/41% of our and consensus’ FY22E estimates. This was largely due to cost pressures that eroded margins.
• We slash FY22-24E earnings per share forecast for Valuetronics by 20-27% to factor in an environment with lower-than-historical margins.

Rising Component and Labour Prices Weigh on Margins

• Valuetronics's 1HFY22 revenue fell 7.3% to HKD1.015b, and was in line with our estimate. Consumer electronics revenue fell 12.5% as orders were cancelled or deferred due to chip shortages. Industrial and commercial electronics decreased 4.8% as expected loss of automotive allocation was offset by growth from printing and sensing customers that are exposed to e-commerce/logistics.
• Gross and net margin fell 2.8ppt to 14.2%/5.6% respectively, due to higher components and labour costs as well as stronger CNY.

Vietnam on Track

• Mass production could begin in the new Vietnam campus headwinds.

Wait for a Better Entry Point

• Downgrade Valuetronics to SELL with EMS peers. While Valuetronics looks cheap on FY23E EV/ EBITDA, we believe continued near-term weakness and uncertainties may present a more attractive entry point for longer-term investors aiming to position for an eventual recovery.

Source: Maybank Kim Eng Research - 10 Nov 2021