Broker's take: Maybank KE downgrades Valuetronics to 'sell' due to near-term headwinds

MAYBANK Kim Eng (Maybank KE) has downgraded its call on Valuetronics BN2 from "hold" to "sell" with a lower target price of S$0.50 compared to S$0.60 previously.

This comes after the electronic manufacturing service provider posted a 38.1 per cent drop in net profit for the first half ended Sep 30, missing Maybank KE and consensus estimates due to cost pressures that eroded margins.

In a research note on Wednesday (Nov 10), analyst Gene Lih Lai revised his earnings per share estimates for FY2022 by 20 to 27 per cent to factor in "an environment with lower-than-historical margins".

He is expecting the stock to face multiple headwinds, including cost pressures, such that its return on equity profile will dip from double to single digits in FY2022 to FY2024.

The resultant target price revision reflects a multiple pegged at 10.6 times FY2023 price-to-earnings (P/E), which Maybank KE said is in line with Valuetronics' global peers.

Lai opined that while the stock looks cheap on FY2023 enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation ratio (Ebitda) valuation, sustained near-term weakness and uncertainties may present a more attractive entry point for longer-term investors gearing themselves for an eventual recovery.

Meanwhile, CGS-CIMB maintained its "reduce" call on Valuetronics but raised its target price to S$0.53 from S$0.50 previously after adjusting its valuations.

In a report on Wednesday, analyst William Tng said he values the electronics manufacturing company based on a 5-year average P/E of 10.5 times, versus a 3-year average of 10 times before.

He believes a potential fall in share price is likely to be partially offset by the group's net cash balance and a prospective dividend yield range of 4.25 to 5.28 per cent from FY2022 to FY2024.

As such, Tng recommends investors to consider buying into tech dealer Aztech Global and electric component manufacturing firm Venture Corporation instead.

Similar to Maybank KE, DBS sees near-term headwinds persisting for Valuetronics in FY2022. The brokerage in its Nov 11 report lowered its price target to S$0.55 from S$0.60 while reiterating its "hold" call on the stock.

The lower price target stems from reduced FY2022 earnings forecasts after lowering gross profit margin estimates for the period by 2.2 per cent amid the ongoing component shortage and high labour costs in China.

DBS believes that the situation for Valuetronics has "improved slightly", and that the stock continues to trade at a deep discount to peers.

"We believe in holding on to the stock due to its strong financial position and attractive valuation," said DBS.

"In our view, Valuetronics is approaching the turnaround story by end-FY2022 with the ramp-up of its Vietnam plant, revenue from potential new customers, and tailwinds from the logistics and e-commerce industries."

Valuetronics shares were trading S$0.005 or 0.9 per cent lower at S$0.56 as at 4.14 pm on Nov 11.