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3 Reasons Dividend Investors Should Love Valuetronics Holdings Limited

Jeremy Chia

The ongoing trade war has scared many investors off of manufacturing firms that rely heavily on North American buyers. Valuetronics Holdings Limited (SGX: BN2), an electronics manufacturing company with all its factories located in China, has not been spared.

With around 45% of the firm’s revenue coming from US customers (and around half of its US shipments being subjected to a 25% tariff), it is not difficult to see why investors have been so put off. The trade war and its eventual outcome are still very much uncertain.

But despite the threat of the impact of the trade war, Valuetronics has characteristics that make it a promising proposition for income investors. Here are three reasons I think investors should sit up and take notice of this under-appreciated stock.

Diversifying its production facilities

The trade war has already had a very real impact on Valuetronics business. According to analyst reports, Valuetronics missed out on manufacturing orders for smart lighting products from US customers because of the tariffs imposed on Chinese imports.

As such, there could be a short-term impact on the group’s top line as US orders made up 50% of its total smart lighting orders previously.

That said, Valuetronics has already taken steps to set up a production facility in Vietnam. The leased site in Vietnam has already been qualified by a customer and mass production began in June 2019, with shipments already being made from Vietnam to the US market.

Moving forward, Valuetronics intends to acquire a plot of land in an industrial park to build its own manufacturing campus in Vietnam. While the capital expenditure for a new plant will result in lower free cash flow generation in the coming quarters, the investments seem like a prudent step to take. It also demonstrates management’s nimbleness and willingness to adapt to the changing market conditions.

Robust balance sheet

On top of that, Valuetronics has a robust balance sheet that will allow it to weather the near-term challenges and to fund its expansion into Vietnam. 

As of 30 June 2019, Valuetronics had a net cash balance (cash minus debt) of HK$993 million. As the group’s core operations have been generating a steady stream of cash each year, Valuetronics has built up an enviable amount of cash that can be used for expansion or be returned to shareholders in the future.

In the most recent quarter, Valuetronics generated HK$74 million in cash from operations and spent just HK$17.5 million in capital expenditures. As such it generated a healthy HK$56.5 million in free cash flow.

Its net cash as a percentage of its market cap is also much higher than it was in previous years. At the time of writing, it’s market cap stood at HK$1.5 billion, which means its net cash position made up close to two-thirds its entire market cap. The table below shows the group’s market cap, net cash position, and net asset value over the years.

Source: Valuetronics Holdings Limited FY2020 Q1 Earnings Presentation

Rewarding shareholders

Lastly, Valuetronics has committed to paying out 30-50% of its earnings to shareholders in the form of dividends.

The chart below, which is taken from its investor’s presentation slide, shows the group’s dividend history over the last 11 years. 

Source: Valuetronics Holdings Limited FY2020 Q1 Earnings Presentation

As you can see, the group’s earnings per share (yellow bar), though not a straight line, has a clear upward trend. Likewise, the group has increased its dividend steadily as earnings per share increased.

More importantly, in 2019, the group’s dividend payout ratio was still just 54%, which gives the group room to increase its dividend in the future.

The Foolish bottom line

Valuetronics is most definitely going to face near-term challenges due to the ongoing trade war between China and the US. However, the group has capable management that has seen it through difficult situations and has delivered a solid track record of growing its business. 

The manufacturing firm also has a robust balance sheet and generates healthy free cash flow each year.

Perhaps the most compelling reason why Valuetronics makes a great investment is its ridiculously cheap valuation at the moment. Its net cash position makes up more than 60% of its market cap and based on its FY2019 dividend of 25 Hong Kong cents per share, has a juicy trailing dividend yield of 7.0%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia doesn’t own shares in any companies mentioned.

Motley Fool Singapore 2019