Brokers' take: Analysts mixed on Valuetronics on better-than-expected H2 earnings but challenging year ahead

STRONGER-than-expected industrial and commercial electronics (ICE) momentum helped to boost net earnings for Hong Kong-based electronics manufacturer Valuetronics in the second half of FY2021, but analysts agree that FY2022 will still be a challenging year.

They also noted that the group’s Vietnam campus, on track for construction completion by end-FY2022, will be a growth driver, though they differ on whether it is significant enough to improve Valuetronic’s outlook in the challenging operating environment.

"We see this as an important proposition in courting new customers," said Maybank Kim Eng (Maybank KE) analyst Lai Gene Lih in a Monday report, adding that a return to growth would be a key catalyst for the stock to rerate.

In a separate report on Monday, CGS-CIMB analyst Darren Ong said: “We believe that Vietnam positions Valuetronics as a regional player and offers customers an alternative site in order to diversify supply chain risks to meet their global manufacturing requirements.”

However, above expected earnings and expansion in Vietnam were not enough to turn CGS-CIMB positive on Valuetronics, as it lowered its target price to 50.4 Singapore cents from 53 cents previously, reiterating “reduce”.

On the other hand, Maybank KE has raised its target price to 60 Singapore cents from 58 cents previously, leaving its “hold” call unchanged. DBS Research Group agreed with Maybank KE’s call, increasing its target price to 60 Singapore cents from 53 cents previously and maintaining “hold” in a Tuesday report. 

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DBS analysts Chung Wei Le and Ling Lee Keng believe that Valuetronics is “almost there”, and urged investors to wait for the turning point. Maybank KE’s Mr Lai has also said it believes that the “bottom may be nearing”.

In H2 FY2021, ICE benefited from a higher sales mix and logistics and printing customers on the back of the Covid-19-driven e-commerce boom, analysts noted. This commanded better operational performance management that offset the decline from its consumer electronics (CE) segment.

Delays in the switch over of its automotive customer to a new vendor due to the pandemic also helped Valuetronics to beat expectations. Revenue rose 20.2 per cent year on year to HK$1.19 billion (S$202.3 million), Maybank KE's Mr Lai said.

Despite the strong balance sheet and the potential of the Vietnam campus, CGS-CIMB’s Mr Ong is negative on the group’s outlook, given the exit of its automotive customer, rising component prices amid a global shortage, and ongoing macro uncertainties causing a lack of earnings visibility.

DBS analysts said that the loss of its automotive customers’ business in the US will be significant, and the global component shortage is beginning to affect Valuetronics’ ability to meet orders, even as it is working to solve the issue.

“Valuetronics may procure certain components that are available on the spot market, but these will come at a premium. The situation is worsening with demand staying high and supply continuing to remain tight,” he said. 

They believe the impact is “inevitable and will be significant” in FY2022, but hold out hope for a reversal and have raised their earnings estimates for FY2022 to FY2023.

Valuetronics has always had a very prudent approach in its management of cash, which has provided strong support for its share price, they said in their report.

“We are patiently awaiting the turnaround story when its Vietnam campus is completed in end-FY2022 and as the switch-over of its customers to other vendors is completed.” 

Mr Lai also acknowledged the same disadvantages, while at the same time raising EPS estimates for FY2022 to FY2023.  He added that with strong customer satisfaction and expansion in Vietnam, the worst of customer allocation losses could be over.

On Tuesday, shares of Valuetronics were trading at 62 Singapore cents, down 0.5 cent or 0.8 per cent, as at 4.08pm.