Advertisements

1HFY22: Below Expectations; Outlook Remains Challenging

1HFY22 net profit of HK$57m (-38% yoy/-41% qoq) was below our expectations, forming 41% of our full-year estimate, due to weaker-than-expected gross margin. 1HFY22 revenue (-7% yoy) and gross margin (-2.8ppt) were impacted due to the components shortage and cost pressure in China because of the appreciating renminbi. VALUE expects forward outlook to remain challenging. We reduce our FY22 and FY23 EPS by 29%. Maintain HOLD with a 21% lower target price of S$0.52.

RESULTS

• Results below expectations. Valuetronics’ (VALUE) 1HFY22 net profit of HK$57m (-38% yoy/-41% qoq) came in below expectations, forming only 41% of our full-year earnings forecast. The underperformance was largely due to weaker-than-expected gross margin. 1HFY22 gross margin fell 2.8ppt to 14.2% as it was impacted by higher component prices due to tight supply, increased labour and operating costs in China under an appreciating renminbi.

• Revenue declined for both the ICE and CE segment due customer switching supplier and components shortage. VALUE’s industrial and commercial electronics (ICE) segment’s revenue declined 4.8% yoy to HK$695m, due to a significant drop in sales
because of an automobile customer who switched its production from the group’s factory to another vendor in North America. The fulfilment of certain ICE customers’ orders was also affected by the components shortage, but this was offset by revenue growth from a printer customer benefitting from e-commerce sales and a sensing devices customer benefitting from their product’s application in the logistics industry. On the consumer electronic (CE) front, the cancellation and deferral of customer orders as a result of the components shortage led to a 12.5% yoy drop in sales for the segment to HK$319m.

Advertisements

• Challenging outlook. VALUE expects the global components shortage to continue to affect its ability to fulfil customers’ orders on time. Also, a strong renminbi and increasing operating cost in China may continue to impact gross margin. VALUE will continue its efforts to secure new business opportunities, identify new suppliers and negotiate new prices with customers.

• Proposed interim dividend of 4 HK cents/share. The group has recommended an interim dividend of 4 HK cents/share for 1HFY22 (5 HK cents in 1HFY21). This represents a payout ratio of 31%.

STOCK IMPACT

• Challenging outlook. 1HFY22, VALUE’s operations were adversely affected by the global components shortage which resulted in price surges and prolonged order lead times for a wide range of electronic components. Furthermore, the ongoing COVID-19 pandemic continues to disrupt the capacity of the electronic component industry, which worsens component availability. VALUE expects the global components shortage to continue to affect its ability to fulfil customers’ orders on time. This, together with the strong renminbi and increasing operating cost in China, will continue to erode VALUE’s profit margin in the near term. In order to mitigate these adverse impacts, VALUEwill continue its efforts to secure new business opportunities, identify new sources of supply, qualify alternative parts, and negotiate new prices with customers.

Advertisements

• Construction of Vietnam campus on track. VALUE’s Vietnam expansion remained on track despite the surge in COVID-19 cases. Its newly-constructed Vietnam campus in Vinh Phuc province was granted with a fire inspection certificate from the local government in 1HFY22 and selected products of two existing customers have been put to trial production. VALUE expects mass production at its Vietnam campus to commence by the last quarter of FY22 following the satisfactory completion of ISO and customer audits, unless a new wave of COVID-19 infections leads to a lockdown in Vinh Phuc province, causing disruptions to
VALUE’s production schedule. VALUE’s Vietnam campus provides scalable capacity to meet the diversified needs of global customers and a solution to cope with the Sino-US trade situation. There have been positive responses from potential customers with regard to VALUE’s regional manufacturing footprint strategy. These potential customers include a hardware provider for retail chain stores and a customer providing cooling solutions for high performance computing environments. VALUE is finalising business terms with these potential customers and this is subject to the constraints in supply chain.

EARNINGS REVISION/RISK

• We cut our FY22-24 earnings forecasts by 28-29%, after reducing our gross margin assumptions by 2.3-2.4ppt to 13.6%/13.8%/13.8% for FY22/23/24 respectively (down from 16.0%/16.0%/16.1). This is to account for the rising production costs due to the components shortage and increased labour costs in China.

Advertisements

VALUATION/RECOMMENDATION

• Maintain HOLD with a 21% lower target price of S$0.52, pegged to a peers’ average of 12x PE for FY23. We rollover our valuation base year to FY23.

SHARE PRICE CATALYST

• Additional customers in the new sectors.
• Higher-than-expected dividends and potential M&As.