SINGAPORE (June 22): DBS Research analyst Lee Keng Ling has initiated coverage on integrated electronics manufacturing services provider Valuetronics Holdings with a “hold” call and target price of 53 cents.
The price is based on a 12-month rolling forward PE of 9.4x, which is its 4-year average.
In a note dated June 19, Ling believes that the heightened trade tensions between the US and China could lead to the company’s customers shifting their supply chains out of China.
As 39.4% of the company’s revenue stemmed from the US in FY20, she forecasts a 28%/10% loss in revenue for its Fy21F/22F’s sales due to its customers’ diversification of its supply chain out of the Middle Kingdom.
“Despite the current headwinds the Group is facing, including the potential loss of customers as a result of a shift in supply chain and a weak economic outlook, we believe that its strong fundamentals and strategic plans to diversify out of China would allow it to tide through the difficulties – thus forming the basis of our ‘hold’ recommendation,” she says.
On the back of nationwide lockdowns, recovery is expected to be slow and gradual due to the absence of the Covid-19 vaccine and weakened economic outlook. As such, Ling expects Valuetronics’ Consumer Electronics (CE) and Industrial and Commercial Electronics (ICE) segments to slow down in FY21F, and FY22F.
However, Valuetronics possesses strong fundamentals to tide through difficulties, says Ling.
The company has a cash reserve of some HK$1 billion (S$180.3 million), which will help it tide through the low times.
Its Vietnam expansion that is scheduled to complete by the end of FY22F will offer its existing and new customers an alternative manufacturing site.
“We believe the downside risks and uncertainties may cap share price appreciation in the near-term. Key developments that would warrant a change in recommendation include more clarity on the impact of the loss in customers and a stabilisation of the economic outlook,” she adds.
As at 11.37am, shares in Valuetronics are changing hands 1 cent lower, or 1.7% down, at 57 cents.
