Brokers’ take: DBS cuts Valuetronics target price to S$0.51 on weaker margin estimates

DBS Group Research expects margins for electronics manufacturing services provider Valuetronics : BN2 0%will remain weak amid headwinds from supply chain disruptions and macroeconomic uncertainties.

In a report on Friday (May 27), analyst Ling Lee Keng lowered her target price on the counter to S$0.51 from S$0.55, after she cut earnings estimates by 18 per cent in FY2023 and 23 per cent in FY2024 on lower gross margin assumptions.

The brokerage maintained its “hold” call on Valuetronics, although it added it was suspending coverage due to the reallocation of resources.

Shares of Valuetronics were trading at S$0.525 at 10.59 am on Friday, up S$0.005 or 1 per cent.

Valuetronics on Thursday posted a 40.5 per cent on-year drop in its net profit to HK$56.9 million (S$10 million) for the second half ended Mar 31, while revenue was down 14.6 per cent on year to HK$1 billion in the period.

For the full year ended Mar 31, net profit was down 39.3 per cent to HK$113.5 million, while revenue was down 11.1 per cent to HK$2 billion.

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The company said the severe shortages of certain key electronic components had impacted its ability to meet orders in the full-year period.

DBS’s Ling expects headwinds from component shortages, inflation, the Covid-19 pandemic, the Russia-Ukraine conflict, and US-China trade tensions will persist and weigh on Valuetronics’ margins in FY2023.

While the company’s consumer electronics segment grew in FY2022 mainly due to the rebound of orders from smart lighting customers, Ling said this will unlikely continue because of lower customer forecasts and the component shortage.

The analyst, however, is positive on Valuetronics’ sound balance sheet with no debt, and its high cash-to-market capitalisation ratio.

She also expects the ramp-up of the company’s Vietnam plant and potential contribution from new customers will help to boost its bottom line.