PhillipCapital analyst Paul Chew is keeping his “buy” call on Valuetronics BN2 with a raised target price of 76 cents from 70 cents previously following the company’s FY2024 ended March 31 results.
In his June 3 report, Chew writes that although Valuetronics’ FY2024 revenue was only 89% of his estimates for the period, its profit after tax and minority interests (patmi) was “better than expected” at 105% of his forecast.
“Lower depreciation, effective tax, and higher interest income were the reasons for the outperformance,” adds Chew.
On the company’s lower revenue, Chew writes: “Revenue was weaker than expected due to drag in legacy products such as consumer product printed circuit board assembly (PCBA) and auto entertainment modules. Customers have permanently switched their supply chains out of China.”
Despite this, the analyst notes Valuetronics will soon see “contributions from new customers”, in networking products and theme park entertainment devices.
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Meanwhile, he notes that gross margins for the period expanded by 3% points y-o-y to 15.6%, the “highest in three years”.
“New products, weak renminbi, falling depreciation and less (spot) pricy electronic components are driving up margins. Net margin was also boosted by the overprovision of taxes in 1HFY2024, lower depreciation and interest income is not taxable,” writes Chew.
Notably, Valuetronics’ free cash in FY2024 was HK$212 million ($36 million), an improvement over the previous year’s HK$163 million.
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Including special dividends, the company is paying out 25 HK cents to its shareholders for the period, which Chew notes is a 25% rise from FY2023.
The analyst writes: “Capital expenditure (capex) will remain low at HK$20 million. This is after the massive capex spend of around HK$90mn per annum (p.a.) for three years in FY2020 to FY2022 on a new Vietnam factory.”
On the 2HFY2024, while Valuetronics’ earnings grew 19% y-o-y to HK$77 million “due to higher gross margins and a doubling of interest income”, revenue declined 19% y-o-y to HK$778 million.
Chew explains that the “biggest drag” to revenue was the 23% y-o-y fall in the company’s industrial and commercial electronics (ICE) segment, which suffered from a combination of its household consumer and auto products “fading out” due to a supply chain exit, while its “weak” printers category has been hurt by excess inventory post-pandemic.
“Our target price is based on industry valuations of 11 times price-to-equity ratio (p/e) one-year forward earnings,” writes the analyst as he keeps his FY2025 patmi estimates unchanged.
Chew highlights that with a cash pile of HK$1.16 billion, Valuetronics’ valuations “remain attractive” with around 80% of its market capitalisation in net cash, while the company is also “aggressively” returning capital with its increase in dividends and its “outstanding” share buyback plan of HK171 million.
On his outlook, Chew expects revenue and margins to improve as new customer contributions increase.
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“The pace of the turnaround will still be constrained by some remaining legacy products.”
He adds: “For new customer ramps to be meaningful, they require at least two years.”
“Weak macro may delay the launch of some products and cause customers to keep leaner inventory levels. However, we also expect Valuetronics to add more new customers with their excess capacity in Vietnam,” concludes the analyst.
As at 2.39 pm, shares in Valuetronics are trading 0.5 cents lower or 0.80% down at 62 cents.
