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We are almost there

  • 1HFY22 PATMI below our expectations, declining 38.1% y-o-y to HK$56.6m
  • Gross profit margin impacted by component shortage, labour tightness, and stronger RMB
  • Component shortage to persist in the near term
  • Maintain HOLD with a lower TP of S$0.55

Investment Thesis: 

Strong balance sheet, deep discount to peers. Valuetronics has cash of HK$936m (c.63% of market capitalisation) and no borrowings. It is currently trading at a 13.8/10.4x FY22/23F PE, which is at a deep discount to its peers’ average of 18.4/15.9x. 

Headwinds to persist in FY22F. 
We remain neutral on Valuetronics, as we believe that the overhanging weakness from the component shortage and potential downside risks weigh on the stock, at least until end-FY22F. 

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Wait for the turnaround. We believe in holding on to the stock due to its strong financial position and attractive valuation. In our view, Valuetronics is approaching the turnaround story by end-FY22F with the ramp-up of its Vietnam plant, revenue from potential new customers, and tailwinds from the logistics and e-commerce industries.

Valuation:

Maintain HOLD with a lower TP of S$0.55. Our TP is pegged to 11.0x (+0.3 SD) FY22F earnings. It is currently trading at a 13.8/10.4x FY22/23F forward PE, which is below its peers’ average of 18.4/15.9x.  

Where we differ:

We believe in the value of holding on to Valuetronics given its strong balance sheet, deep discount to peers, and eventual turnaround story when its Vietnam facility is completed and the US business development bears fruit.

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Key Risks to Our View:Protraction of the COVID-19 pandemic, re-escalation of the US-China trade war, customer concentration risk, and/or a cut in dividends.