Valuetronics – Remains cautious on its outlook

Excerpts from UOB KayHian report

Valuetronics Holdings (SGX:  BN2)

• Valuetronics FY22 net profit of HK$114m (-39% yoy/+1% hoh) was above expectations, forming 115% of full-year estimate, due to a lower-than-expected revenue decline.
• Valuetronics's outlook remains cautious as it expects the ripple effect of the supply chain bottlenecks to last beyond 2022. Other uncertainties include the COVID-19 pandemic, the Russia-Ukraine conflict and US-China trade tensions.

We raise our FY23 EPS by 8%. Maintain HOLD and target price of S$0.52.

Valuetronics results was above expectations

Valuetronics’ (VALUE) FY22 net profit of HK$114m (-39% yoy) was above our expectations, beating our estimate by 15%. The beat was due to a lower-than-expected revenue decline in 2HFY22. Revenue fell 11% yoy due to severe shortages of certain key electronic components that affected VALUE's ability to meet orders. Gross margin fell 3.3ppt to 13.6% due to:

• higher component prices caused by tight supply, and
• China’s increased labour and operating costs, under an appreciating renminbi.

The ICE segment’s revenue declined due to its customer switching suppliers and a shortage of components

VALUE’s industrial and commercial electronics (ICE) segment’s revenue decreased 17.5% yoy to HK$1,320.5m in FY22 (FY21: HK$1,600.8m) This is due to a significant drop in sales caused by its auto customer switching its production over to another vendor in North America. Furthermore, the shortage of key electronic components also affected order fulfilment for certain ICE customers. On the consumer electronic (CE) front, revenue rose by 3.8% to HK$706.9m in FY22 (FY21: HK$680.7m), mainly due to a rebound in orders from smart lighting customers.

Cautious outlook due to potential headwinds

VALUE remains cautious on its outlook as it expects the ripple effect of the supply chain bottlenecks to last beyond 2022. VALUE also anticipates potential headwinds from:

• the component shortages,
• the COVID-19 pandemic,
• the Russia-Ukraine conflict, and d) US-China trade tensions

Valuetronics earnings forecasts

We raise our FY23-24 earnings forecasts by 8%, after increasing our revenue assumptions by 13% to account for an increase in ASP to pass on extra input costs. On the other hand, we have reduced our gross margin assumption by 0.1ppt to 13.7%/13.6% for FY23/FY24. This is to account for the rising production costs due to the shortage of components and increased labour costs in China.

Valuation/Recommendation

Maintain HOLD and target price of S$0.52, pegged to a peers’ average of 11x PE (reduced from 12x due to sector de-rating) for FY23 You can find the full report here and the company website here