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Still some way to go

  • 1HFY3/22 net profit at 45.2%/40.7% of our/consensus full-year forecasts was below expectations.
  • Management guided that component shortages and higher operating costs will lead to significantly lower yoy performance in FY22F.
  • Reiterate reduce call on Valuetronics. Switch to Aztech Global Ltd and Venture Corporation.

1HFY22 net profit fell 38.1% yoy

Over the past 5 years (including the distortion from US-China trade tensions and Covid-19 starting in 2020), the first-half has on average accounted for c.50% of Valuetronics full year revenue/net profit. For FY22F, 1HFY22 revenue was above the historical average at 56.5%/53.0% of our/consensus full-year expectations but net profit at 45.2%/40.7% of our/consensus full-year forecasts was below. Although 1HFY22 revenue fell 7.3% yoy, gross profit margin fell 2.8% pts yoy to 14.16% in 1HFY22 versus 16.98% in 1HFY21. The margin erosion was due to higher component costs and higher operating costs in its China plants.

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FY22F net profit to be significantly lower yoy

Management expects the global component shortages to continue to affect its ability to fulfill customers’ orders (the company experienced some order cancellations in 1HFY22). Component shortages coupled with increasing operating costs in China led the
management to guide for margin erosion in the near term. In its 1HFY22 results commentary, management guided that these factors will lead to FY22F results being significantly lower compared to FY21.

New Vietnam plant making progress

Valuetronics’s newly constructed Vietnam campus in Vinh Phuc Province has started trial production for some customers. The group expects to be able to commence mass production for customers by 4QFY22 (1QCY22). The key downside risk would be a new wave of Covid-19 infections leading to a lockdown in Vinh Phuc Province.

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Prefer Aztech, Venture

We keep our Reduce call on Valuetronics against the backdrop of a still challenging operating environment in FY22F. We also adjust FY22F net profit expectations downwards to reflect the margin pressure. We value Valuetronics based on its 5-year average P/E of 10.5x (previously 3-year average of 10.0x) on FY23F EPS. Our TP rises to S$0.533 (S$0.504 previously). Share price downside will likely be partly offset by its net cash balance and 4.25%-5.28% prospective dividend yields. We prefer Aztech Global Ltd (AZTECH SP, Add, TP S$1.75, CP $1.02) and Venture Corporation (VMS SP, Add, TP S$23.32, CP S$18.41). Upside risks: possible new customer wins for its new Vietnam plant (Valuetronics is currently in talks with two potential customers).