Analysts from DBS Group Research, Maybank Kim Eng, and RHB Group Research are still pessimistic over Valuetronics, despite its 1HFY2021 earnings coming in above their expectations.
Valuetronics recorded a profit after tax and minority interests (PATMI) of HK$91.5 million ($29.85 million), a drop of 12.1% y-o-y. It also declared an interim dividend of five HK cents per share.
RHB Group Research analyst Jarick Seet has maintained his “sell” rating with a target price of 50 cents, as he believes profitability will be “severely impacted with no upside catalysts in the near term”.
This comes as some customers in the automotive industry and consumer electronics (CE) segment continue their planned transfer of production for the US end-market from China to North America and Asean, as well as the switchover by some of its customers to other suppliers in these regions, which is expected to impact Valuetronics negatively in FY2022, in his view.
Seet noted this stemmed from the conflict between the US and China over the origins of the pandemic fanning broader tensions on trade and technology, and the Trump Administration’s continuous push for US companies to move their supply chain out of China.
However, several companies in the automotive industry and CE segment have plans to switch over to other suppliers in North America and Asean to serve the US market. In FY2020, about 39% of the group’s revenue was shipped to the US.
The switchover is expected to be completed by end-FY2021, with the negative impact seen in FY2022. As a result, we expect revenue to drop by 25% in FY2022 across both segments.
While he also noted that Valuetronics’s expansion into Vietnam is progressing as planned and will be financed with internal cash resources, he expects management to conserve its cash pile with the “tough times ahead”,
As such, the company will likely cut dividends as it did in 1HFY2021, especially when earnings are likely to be weaker. Seet expects a yield of 6% for FY2021F and 4.6% for FY2022F.
He said “with the uncertain and challenging outlook ahead, we feel that investors would benefit more if they switch to other stocks.”
On the other hand, DBS Group Research’s Chung Wei Le and Ling Lee Keng are more positive on the stock, highlighting its “strong balance sheet”.
They noted Valuetronics has cash of HK$1.1billion (79% of market capitalization) and no long- term borrowings. It is currently trading at 9.4x/10.9x FY2021/2022 PE, at a deep discount to its peer average of 19.4/15.2x.
However, they also warn that the company could potentially lose more of its US customers due to supply chain relocation, and as US-China trade tensions remain unresolved.
Ling and Lee believe the uncertainties surrounding its loss of customers’ business in the US and pandemic-impacted demand will continue to put pressure on its share price and earnings in the near term.
“We think that now is the time to be patient and we are awaiting the turnaround story when its Vietnam campus is completed by end-FY22F and as the Group’s business development efforts begin to bear fruits in the US.” they add.
Meanwhile, Maybank Kim Eng’s Gene Lih Lai downgraded his rating to “hold” with a target price, and lowered his target price from 66 cents to 58 cents.
He said the company’s earnings came in ahead of expectation, but this was because the allocation switch-overs to other suppliers were disrupted by Covid-19 and are mostly delayed till 2HFY2021.
To account for this, Lai has raised FY2021E earnings per share (EPS) by 24%, but cuts FY2022-2023E EPS by 14-20%.
As at 2.43pm, shares of Valuetronics were trading at 57 cents, with a FY2021 price to book ratio of 1.1 and dividend yield of 4.6%.
