Brokers' take: More earnings upside seen for Valuetronics

BROKERAGES here are largely bullish on the prospects of Valuetronics Holdings, increasing their price targets for the stock after the electronics manufacturer posted Q3 earnings that beat estimates, with more earnings upside tipped for the coming quarters.

On Wednesday, Valuetronics reported a 26.3 per cent rise in bottom line for Q2 FY2020 to HK$56 million (S$9.7 million) from HK$44.3 million in the year-ago quarter. Profits rose mainly due to the absence of a HK$13.6 million one-off provision related to flash flooding at the company's Danshui plant in China in the year-ago period.

While top line for Q2 dipped 0.5 per cent to HK$712.8 million from HK$716.2 million, John Cheong, UOB Kay Hian's head of small/mid cap research, noted the company's performance was "commendable given the trade tensions (between the US and China)".

Analysts also noted that Valuetronics' first half year typically accounts for 50 per cent of its full year revenue, but revenue for the period has hit close to 60 per cent of their full year estimates.

"Moving forward, we expect the pace of revenue decline to reduce gradually as the smart lightings for the consumer electronics (CE) segment has been fully phased out," Mr Cheong wrote in a Thursday report.

RHB analysts Jarick Seet and Lee Cai Ling said: "As trade war-related tariffs may be removed in phases, and as Valuetronics secures new customers in the communications sector, there should be some positive earnings upside ahead."

Bearing in mind the unpredictable nature of the relationship between the US and China, since early 2019 Valuetronics has been investing in expanding its manufacturing footprint to Vietnam, a market viewed as a key beneficiary of any trade fallout between the two economic powers.

UOB's Mr Cheong acknowledged such efforts to diversify the locations of its manufacturing facilities provides for long-term growth.

Valuetronics' first leased Vietnam manufacturing facility began mass production in June, with shipments being made to the US. There are plans to lease another factory to cater for urgent customer demand and also develop two of its own facilities in Vietnam, Maybank Kim Eng analyst Lai Gene Lih said.

"We understand customers are already in discussion with Valuetronics on potentially leveraging its Vietnam facilities for newer generations of products down the road," he added.

With the company in a net cash position of HK$1 billion, CGS-CIMB analyst Ngoh Yi Sin, who views the Vietnam expansion as a "long-term positive" does not believe there will be funding difficulties but noted "there could be expect some start-up costs in FY2021-2022".

Valuetronics has also declared a improved distribution to shareholders.

Maybank's Mr Lai said that Valuetronic's interim dividend per share (DPS) for the first half of FY2020 of 6 HK cents was a "positive surprise" from the 5 HK cents doled out for the first six months of FY2019. He said this signals the company's "willingness to maintain or increase absolute DPS levels and shows confidence in the business' prospects".

Following Wednesday's results release, RHB upgraded its recommendation to "buy" with a target price of S$0.73. Meanwhile, the other brokerages held their calls but raised price targets. Maybank Kim Eng maintained a "buy" recommendation with a target of S$0.98, UOB Kay Hian has a "buy" call with a target of S$0.91 while CGS-CIMB has a "hold" call with a target price of S$0.72.

At 3.48pm on Thursday, the counter, which is trading on a cum-dividend basis, was up 1.5 Singapore cents or 2.1 per cent to 74 cents with 7 million shares traded.