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PhillipCapital initiates ‘buy’ on Valuetronics with TP of 61 cents

"We expect a turnaround for Valuetronics after securing four new customers for FY2024/FY2025," says analyst Paul Chew.

PhillipCapital analyst Paul Chew has initiated coverage on Valuetronics BN2, an electronics manufacturing services (EMS) provider with a “buy” call and a target price of 61 cents.

“After five years of revenue decline, we expect a turnaround for Valuetronics after securing four new customers for FY2024/FY2025,” he writes.

After experiencing a revenue peak of HK$2.85 billion ($497.6 million) in 2018, the company saw its revenue decline by 29% to HK$2 billion in the past five years.

At the time, US customers were shifting their production operations out of factories in China and into Indonesia or Mexico. The move was due to tariffs that could go up to 25%. As such, Valuetronics had to spend HK$200 million to build a new factory in Vietnam.

Subsequently, the company faced challenges including pandemic-related component shortages, its customers exiting the Russian market as well as disruption in its business development activities due to the travel restrictions.

However, the major headwinds are deemed to be behind the company now, says Chew, who adds that the company is “poised for growth in the coming years”.

“We expect margins to improve from higher industrial and commercial electronics (ICE) contribution, weaker RMB and more stable component prices and depreciation,” he notes.

Furthermore, with its new plant set up in 2022, the company has been able to secure four new customers that will contribute to its revenue in FY2024 and FY2025.

“Customers are not willing to keep manufacturing solely in China. This is because of higher tariffs in the US, and customers wanting to de-risk due to the escalating geopolitical tensions,” Chew points out.

“The four new customers are for electronic price tags at retail outlets, liquid cooling solutions for gaming computers, electronic souvenirs in entertainment facilities and network access products,” he adds.

As at Chew’s report dated Sept 22, shares in Valuetronics are trading at 52.5 cents, which he deems as attractive at 9.6x P/E. The company’s net cash balance sheet of HK$1 billion is also something Chew is positive about.

“In February 2022, Valuetronics announced an aggressive share buy-back programme worth HK$250 million. The company has since utilized HK$68 million to repurchase 22.5 million shares. Another HK$182 million is available to purchase another 60 million shares at the current price levels,” says Chew.

His target price is based on 11x Valuetronics’ FY2024 P/E, which is in line with industry valuations.

As at 4.46pm, shares in Valuetronics are trading flat at 52.5 cents.

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