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Buying opportunity for investors as Valuetronics hovers near 'crisis valuations'

Uma Devi
Uma Devi • 3 min read
Buying opportunity for investors as Valuetronics hovers near 'crisis valuations'
Valuetronics has what analysts term a 'robust balance sheet' with a cash position of HK$1 billion and no debt.
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SINGAPORE (Mar 30): Year to date, Valuetronics’ share price has plunged some 42% in light of the escalating Covid-19 situation which has affected business sentiment adversely.

However this might be a blessing in disguise for investors, according to Maybank Kim Eng Research. The brokerage argues that most risks appear to be already priced in for the stock, suggesting a limited downside barring any further escalations or complications.

In a Monday report, analyst Lai Gene Lih notes that the counter is trading at only 1.2 times its FY2020E ex-cash price-to-earnings (P/E), not far from crisis valuations during the global financial crisis and an especially difficult year in 2013. These were the only two times the group had negative valuations to its name.

While Lai attests that this poses an attractive buying opportunity, the brokerage has slashed its FY2020-FY2022E earnings by some 2-23% to factor in additional supply chain issues and demand uncertainty.

“Valuetronics expects business sentiment to be uncertain in major markets such as the US, Europe and China,” says Lai. “Valuetronics noted that since last week, some suppliers and end-customers in various countries have temporarily shut down to halt the spread of Covid-19.”

“We note that customers are beginning to turn cautious. For instance, its automotive customer has withdrawn its guidance amid increasing supply-chain and end-demand uncertainties on Mar 20,” he adds.

To be sure, Lai acknowledges that the current uncertain outlook will impact the group’s products in the smart lighting, consumer electronics, automotive and various industrial value chains.

Yet, the group’s robust balance sheet could offer some comfort to investors. With a cash position of HK$1 billion and no debt, Lai says that Valuetronics has the means to maintain a distribution per share (DPS) of 25 HK cents for the next two years.

“Valuetronics expects its Vietnam expansion plans to be fully funded via cash. Customers’ liquidity, leverage and coverage ratios also appear healthy,” shares Lai, adding that the group has a strong track record of generating respectable cash flows on the back of consistent profitability and solid working capital management.

This translates to an attractive 8% dividend yield for the group, although the brokerage has factored a lower DPS in the range of 22-23 HK cents pegged to a 63% pay-out ratio, which is also the group’s FY2016 high.

Looking ahead, Lai says that Valuetronics’ acquisition of surface mount technology (SMT) machines in FY2018 is likely to pay off, as these will enable the group to cater to both new and existing customers.

Other share price drivers for the counter include better-than-expected growth of business segments such as IOT bulbs and in-car connectivity modules, new customer acquisitions in industrial and commercial electronics, as well as operating leverage attained from increased production.

On the flipside, Lai is quick to caution investors about key risks for the group which include weaker-than-expected end-demand for customer or industry-specific products, cost increases for labour and materials, as well as unforeseen pricing erosion for key products.

Maybank is reiterating its "buy" call on Valuetronics with a target price of 82 cents, representing a 71% upside for the stock.

As at 11.35am, shares in Valuetronics are trading one cent lower, or 2% down, at 50 cents. This translates to a price-to-book (P/B) ratio of 0.98 times and a dividend yield of 8.2% for FY2020 according to Maybank valuations.

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