Broker's take: DBS initiates coverage on Valuetronics with 'hold' call

DBS Group Research has initiated coverage on electronics manufacturer Valuetronics Holdings with a "hold" call and a target price of S$0.53.

As at 10.42am on Monday, mainboard-listed Valuetronics' shares were trading flat at S$0.58.

In a research note dated Friday, DBS analyst Ling Lee Keng said Valuetronics is trading at a discount to its peers, warranting a "hold" despite the negatives.

The research team also believes the company's strong fundamentals and strategic plans to diversify out of China would allow it to tide through difficulties.

DBS's view comes amid current headwinds which Valuetronics is facing, including the potential loss of customers due to US-China trade tensions, and a weak economic outlook for the company.

Since the onset of the US-China trade war in early-2018, Valuetronics had begun to see customers diversify their supply chains out of China. Despite the Phase One trade deal, many US tariffs placed on China remained. Moreover, a large majority of the company's shipments to the US are subjected to tariffs ranging from 7.5 per cent to 25 per cent.

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Ms Ling also expects a weak and uncertain economic outlook due to the Covid-19 pandemic to weigh on Valuetronics' consumer electronics business in its forecast for FY2021 and possibly FY2022.

That said, Valuetronics' disciplined approach in managing its cash reserves will be useful in tiding the company through difficult times. The company's cash reserves of HK$1 billion (S$180.2 million), which is 52.3 per cent of total assets and 76.4 per cent of its market capitalisation.

The cash reserves are sufficient to fund DBS's estimated cash burn rate for Valuetronics at HK$200 million, as well as the company's Vietnam expansion at HK$200 million.

Valuetronics' expansion of its Vietnam facility will help provide an alternative manufacturing site to existing and new customers. The new facility, scheduled for completion at the end of fiscal 2022, will almost be equivalent in size to its 600,000 square feet China facility.

Valuetronics has also expanded its business development team in the US to source for additional customers, the report noted.