Valuetronics - DBS Research 2022-05-27: Headwinds To Persist

• Weak FY22 results due to supply disruptions, in line.
• Margin pressure to persist; financial position remains strong with 69% cash-to-market cap ratio.
• Cut FY23F/24F earnings forecast for Valuetronics by 18%/23% on weaker margin assumption.

Weak FY22 results due to supply disruptions, in line

• Valuetronics (SGX:BN2) reported net profit of HK$113.5m, down 38.8% y-o-y, on the back of the 11.1% decline in revenue to HK$2,027.4m, in line with our expectations. The severe shortages of certain key electronic components have affected the group’s ability to meet orders on a timely basis.

CE outperformed ICE, but it is not sustainable.

• Revenue for the Consumer Electronics (CE) segment was up 3.8% to HK$706.9m and accounts for 35.9% of total revenue, up from 29.8% in FY21. This was mainly due to the rebound of orders from smart lighting customers. However, this is not expected to continue due to lower customer forecasts and the component shortage.
• Industrial and Commercial Electronics (ICE) revenue for FY22 decreased by 17.5% y-o-y to HK$1,320.5m. This was mainly due to the significant drop in sales caused by one of Valuetronics’s customers switching over production from the group’s factory to another vendor in North America. The component shortage also affected order fulfilment for certain ICE customers.

Margin pressure.

• The gross profit margin for FY22 eased to 13.6% from 16.9% in FY21. 2H22 saw a weaker margin of 13.0% vs 14.2% in 1H22. Overall, net margin was reduced to 5.6% in FY22 from 8.2% in FY21.
• Margins were eroded by higher component prices due to tight supply and increased labour and operating costs in China as a result of the renminbi appreciation.

Sound balance sheet with no debt.

• Valuetronics's cash-to-market capitalisation ratio remains high at 69% for FY22, though it eased slightly from 74% in FY21.

Supply chain headwinds and inflationary pressure to persist.

• Valuetronics expects the component shortages, together with the cost pressure resulting from inflation, to continue to affect the group’s gross profit margin until the global component market is back to normal.
• Though measures to mitigate the impact are in place, headwinds are expected to persist. Valuetronics has implemented various measures towards this end, including identifying alternative parts, re-engineering products to lower cost, and leveraging the group’s supply chain knowledge to identify new sources of supply.

Vietnam expansion plan on track.

• Valuetronics’s newly constructed Vietnam campus in the Vĩnh Phúc province commenced mass production for three customers in the last quarter of FY2022, following the successful completion of ISO and customer audits.

Cut FY23F/24F earnings forecast for Valuetronics by 18%/23% on weaker margin assumption.

• We have lowered our gross margin assumption for FY23F/24F to 13.3%/13.8% from 15.3%/16.3% due to persistent headwinds from component shortages, the COVID-19 pandemic, Russia-Ukraine conflict, and US-China trade tensions. Earnings were cut by 18%/23% as a result.
• Maintain HOLD rating on Valuetronics with a lower target price of S$0.51 (previously S$0.55), pegged to the 4-year average P/E of ~11x.
• See
  • Valuetronics's Share Price,
  • Valuetronics's Target Price,
  • Valuetronics's Analyst Reports,
  • Valuetronics's Dividend History,
  • Valuetronics's Announcements,
  • Valuetronics's Latest News.
• We are suspending coverage on Valuetronics due to the re-allocation of resources.