Friday, 5 June 2020

Finding Value in Valuetronics (BN2.SI)

SHARE PRICE TUMBLES AND WHY?

Valuetronics share price has fell more than 10 percent this last week. This is primarily because of the announcement of FY profit ending 31 March 2020 falling 10.3 percent to HK$179m compare to HK$199.5 million a year ago.

But the biggest risk is not just the Covid19 pandemic leading to the decline in earnings, but US-China trade tensions. This is because Valuetronics has close to 40% of its HKD 2.354B revenue deriving from US.

All analysts have given sell ratings this week.

Nontheless, I think there is Value in Valuetronics despite the pessimism.  

STRONG BALANCE SHEET

Strong Cash Generation
Current ratio is more than two times with total current assets of HKD 1.675B of which cash and bank deposits stand at HKD1,053B. Net cash generated from operations is HKD 346 M. The company has no debts and is a net cash company with SGD0.44 per share. Consider the share price of SGD0.595, you are paying SGD0.155 for the business which has close to 30 years of history with strong earnings results in the past years.  

PE Ratio and Dividend
Market Cap of the company is approx. SGD 260 M. With earnings of SGD 32.5 M (HKD 179 M), PE ratio is 8.

Dividend in 2019 is SGD 0.047 (HKD 0.26) and in 2018 is (HKD 0.25), which translate to approx. 8%.

FY2020 DPS is expected to drop to HKD 0.20 which still yield 6% dividend. Trailing 12 months PE may increase to 10 due to projected fall in earnings. I think the figure is still reasonable for a buy with long term keep.

VIETNAM EXPANSION FOR FUTURE

I also like the fact that Management team has long term vision to see that China Manufacturing is getting more and more expensive, and Vietnam will be a cheaper and very good alternative to China.

See my earlier post here, why I am very positive on Vietnam.

The company already have existing leased production facilities in Vietnam, but a greater ambition is in progress.  A site of more than 110,000 sqm was acquire in Vietnam for the construction of the company’s new manufacturing plant. Mass production is set to start in 2022.  The cost of the Vietnam plant is HKD200m and will be self-funded.

MANAGEMENT TEAM

Vast Experience
The Chairman is the MD who is also in the company since 1996. MD is late 50s which is not too old consider his 24 years in the company. Both the MD and ED are top two shareholders of the company which makes them having ownership to drive the business. The rest of the management all has more than 20 years of relevant business experiences on average.

Good Remuneration Scheme
Also, the MD and ED does not pay themselves high FIX salary despite the good performance of the company. Unlike many public listed companies who despite making huge losses are still paying themselves high fix salary. Instead Valuetronics top two guys drawn 84% of their remuneration from bonus. The highest paid management staffs all have higher percentage of the pay from bonus rather than high fix salary.

LONG TERM FUTURE OUTLOOK

If Sino-US tensions persist, short term earnings will definitely be squeezed, but long-term outlook is bright in my opinion. Valuetronics is in the segment of electronic engineering and manufacturing services which I envisaged will serve a big role in the Technology of future. For e.g. Smart City. It has electronic product for automative industry provides data and media connectivity. Sales in Netherlands in particular to Philips has increase in the past year. This is with regards to smart lightings with IOT features, which I feel will have a big impact with hike demand in time to come. There is also already a technology called “LiFi” which uses light for internet connectivity to improve security within corporations and faster intranet connectivity.

CONCLUSION

Short term financials will be squeezed due to Sino-US trade tensions, hence the tumble of share price lately. But in my opinion, Valuetronics has strong management team and strong balance sheet that can definitely tide them off the storm. In the long term, Vietnam production facilities and technological demand will be the strong catalysts.

Disclaimer : I own shares of Valuetronics at the time of writing and this article is solely my opinion and not advice for you to buy into the shares. 

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