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Broker's take: CGS-CIMB lowers Valuetronics target price to S$0.62 amid Covid-19 outbreak

CGS-CIMB maintained its "hold" call on Valuetronics Holdings, but lowered its target price for the electronics manufacturer to S$0.62 from S$0.72.

The revised target price factors in the effects of supply chain disruptions, a possible economic slowdown and a mixed customer outlook due to the Covid-19 outbreak.

In a report dated March 10, CGS-CIMB analyst Ngoh Yi Sin wrote: "While operations have resumed in the week of Feb 17, production levels (at Valuetronics factories in China) remain below pre-Chinese New Year levels due to shutdown of cities and limited transportation facilities."

Valuetronics has warned of potentially lower revenue for the second half of FY2020 brought about by disruptions to its original planned delivery schedules, she added.

Based on cross-checks done with Valuetronics key customers, CGS-CIMB found the outlook among them to be mixed even as "secular trends remain intact".

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While its consumer lifestyle and smart lighting businesses are riding tailwinds from increasing market penetration and new product launches, consumer spending in China for its grooming products has taken a hit due to Covid-19, Ms Ngoh said.

Within its industrial and commercial electronics segment, she added that higher telecommunication and printer demand could help to mitigate sales weakness for autos.

That being said, CGS-CIMB feels Valuetronics' net cash position of HK$1.03 billion (S$184.2 million) as at end Q2 FY2020 and its positive free cash-flow generation "could buffer against macro challenges".

The brokerage is also of the view that the group will maintain its dividend per share of HK$0.25 for FY2020, which translates to a dividend yield of 7.5 per cent.

Downside risks to Ms Ngoh's call include prolonged disruption from the Covid-19 outbreak, worsening macro and rising material costs.

The stock could be re-rated if there are new customer or product wins, and better revenue visibility.

Last month, RHB Research downgraded Valuetronics to "neutral" and lowered its target price to S$0.76 due to the slowdown in production at the company's Chinese factories.

At the midday break, Valuetronics shares were trading 0.5 Singapore cent or 0.8 per cent lower at 60 cents.

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