DBS Group Research is of the opinion that <a href="https://www.theedgesingapore.com/tags/valuetronics-holdings" target="_blank">Valuetronics</a> is "almost there" in its turnaround story, but other analysts think it may be living on a prayer.

Maybank Kim Eng has downgraded Valuetronics to a “sell” rating from a “hold”, joining CGS-CIMB, who has a “reduce” rating on the stock.

Target prices from these two brokerages stand at 50 cents and 53.3 cents respectively, from their previous figures of 60 cents and 50.4 cents.

In contrast, DBS and UOB Kay Hian Research have maintained their “hold” ratings, although with target prices of 55 cents and 52 cents, down from their previous targets of 60 cents and 66 cents respectively.

<hr/>See: <a href="https://www.theedgesingapore.com/capital/results/valuetronics-reports-381-lower-earnings-98-mil-1hfy22-shortage-key-electronic" target="_blank">Valuetronics reports 38.1% lower earnings of $9.8 mil for 1HFY22 on shortage of key electronic components</a><hr/>

The main reason for the lower optimism among the brokerages is the fact that the company missed expectations for its 1HFY2021 results. Valuetronics’ profits after tax & minority interests (PATMI) came in at HK$56.6million ($9.8 million), 38.1% lower y-o-y, missed the expectations of all four brokerages.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uob-kay-hian-lowers-mpacts-tp-dpu-lower-contributions-china-and-further?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOB Kay Hian lowers MPACT’s TP, DPU on lower contributions from China and further depreciation on forex</a>

UOB Kay Hian’s John Leong sums up the reason for the underperformance as largely due to weaker-than-expected gross margin.

1HFY22 gross margin fell 2.8% to 14.2%, as it was hit by higher component prices due to tight supply, increased labour and operating costs in China under an appreciating renminbi.

DBS analysts Chung Wei Le and Ling Lee Keng elaborated on the labour costs, saying the “zero-Covid stance” adopted by China's government, lockdowns, and the risk of being quarantined in another city have reduced the supply in the labour market in China, resulting in higher labour prices.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uobkh-maintains-overweight-rating-s-reits-after-seeing-healthy-signs?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOBKH maintains 'overweight' rating on S-REITs after seeing 'healthy signs' that inflationary pressures have moderated</a>

In addition, Maybank KE’s Lai Gene Lih noted that consumer electronics revenue fell 12.5% as orders were cancelled or deferred due to chip shortages.

Industrial and commercial electronics decreased 4.8%, and this is as the expected loss of automotive allocation was offset by growth from printing and sensing customers that are exposed to ecommerce and/or logistics.

The DBS analysts foresee that headwinds to persist in FY2022, and believe that the overhanging weakness from the component shortage and potential downside risks weigh on the stock.

This is also echoed by CGS-CIMB analyst William Tng, who highlights that the company’s management expects net profit to be “significantly lower”. “Management expects the global component shortages to continue to affect its ability to fulfill customers’ orders. Component shortages coupled with increasing operating costs in China led the management to guide for margin erosion in the near term...these factors will lead to FY2022 results being significantly lower compared to FY2021,” he writes.

For more stories about where the money flows, <a href="https://www.theedgesingapore.com/section/capital" target="_blank">click here for our Capital section</a>

A bright spot for the company, however, is that its newly constructed plant in Vietnam is on track, and could begin mass production in the first quarter of 2022. DBS also believes 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-FY2022 with the ramp-up of its Vietnam plant, revenue from potential new customers, and tailwinds from the logistics and e-commerce industries," Chung and Ling write.

However, till then, all the analysts note that it will be a challenging outlook for Valuetronics, with CGS-CIMB’s Tng preferring other stocks in the sector such as Venture Corp and Aztech Global.

Shares in Valuetronics closed flat at 57 cents on Nov 11, with a FY2022 book value of 1 and dividend yield of 3.8%, according to DBS

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