SINGAPORE (Nov 27): UOB Kay Hian is naming Valuetronics as its top pick among the small-cap manufacturing companies under its coverage.

This comes after Sunningdale and Memtech missed the research house’s net profit forecasts over the 3Q18 earnings reporting season. Both have been rated “hold” with $1.50 and 91-cent price targets, respectively.

Valuetronics was the only exception, coming in line with expectations despite its headline net profit for the quarter being affected by a flood. As such, UOB highlights the stock as the only small-cap manufacturer under its coverage with a “buy” rating, and has given it a target price of 87 cents.

In a Monday report, analyst John Cheong says he continues to like Valuetronics for its attractive valuation at 2.2 times FY19F EV/EBITDA, and FY19F ex-cash P/E of 3.3 times.

He also notes how the group’s net cash has continued growing to $152.7 million as at end-3Q18, or 55% of its market cap.

Cheong has nonetheless reduced FY18-19 net profit forecasts for all three stocks on near-term headwinds, namely: rising labour costs, especially for plants in China; rising costs of raw materials and utilities due to higher crude oil prices; and pricing pressure as customers turn more cautious on the increasing risks of trade tensions.

“Some customers have even delayed orders to wait for a recovery in consumers’ sentiment. Sunningdale and Memtech recorded revenue growth [over 3Q] but their gross margins were impacted by rising costs and pricing pressure,” notes Cheong.

“Valuetronics reported a marginal decline in revenue but a higher gross margin due to better performance from its higher- margin industrial and commercial electronics (ICE) segment and a temporary disruption to its lower-margin consumer electronics (CE) segment,” he adds.

In the longer term, however, the analyst believes prospects for all companies remain positive as their managements continue to express confidence in their future orders.

“Valuetronics continues to see good demand for connectivity modules used in the automobile industry while Memtech expects delayed orders from a major US MNC client to flow through in 1Q19. Sunningdale is confident of its resilient business model, backed by its global presence which spans 20 manufacturing sites in nine different countries,” says Cheong.

As at 11:16am, shares in Valuetronics, Sunningdale and Memtech are trading at 68 cents, $1.42 and 79 cents, respectively.