UOB Kay Hian (UOBKH) upgraded its recommendation on Valuetronics : BN2 0% to “buy” from “hold” after the electronics manufacturer last week surprised on the upside with a 42 per cent year-on-year increase in first half net profit.

On Thursday (Nov 16), analyst John Cheong highlighted the group’s improved margins from better supply chain visibility and reduced labour costs, despite its overall revenue decline in H1. 

UOBKH’s earnings forecasts for Valuetronics were raised up by 20 per cent for FY2024, 17 per cent for FY2025, and 13 per cent for FY2026 after increasing its gross margin estimates to account for the better supply chain conditions.

The research house also lifted its interest income estimates by around 100 per cent to a HK$52 million (S$9 million) to HKS$54 million range.

This is to account for more favourable interest rates on Valuetronics’ cash balance of about HKS$1.1 billion, said Cheong, noting that the sum was equivalent to around 90 per cent of the group’s market capitalisation. 

UOBKH’s price target on Valuetronics was consequently lifted to S$0.72 from S$0.56, pegged to 10.6 times the stock’s price-to-earnings (PE) estimates for FY2024.

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Cheong said this is based on one standard deviation point above the stock’s historical PE mean to account for potential strong demand from Valuetronics’ four new customers – of which two will commence contributions in H2 of FY2024.

One of the two new customers is a hardware provider customer for retail chain stores, while another provides cooling solutions for high-performance computing environments.

As Valuetronics commenced its initial shipments to these two new customers in end-FY2023, the group expects higher earnings from the two customers’ first full-year contributions in FY2024.

Cheong said: “With full-year contributions expected from the two new customers in FY2024, we maintain a positive outlook on the segment going forward.”

The stock is currently trading at a one-time FY2024 ex-cash PE ratio and offers an “attractive” FY2024 dividend yield of around 7.7 per cent, in his view.

Shares of Valuetronics were trading flat at S$0.55 as at 11.09 am on Thursday.