Valuetronics SG. Crisis valuations. Long term buyers: Get it under 50 SG cents.

April 2, 2020

 

 

This is going to be short and sharp.

 

Today, I saw another hippie rich man who is not in the financial industry say "for sure the market is going to go lower!"

 

Great. That's the reason why companies like valuetronics is sold down to this level.

 

You have the spectre of the COVID global deep recession / depression, plus the fact that it has it's main factory in China (with a slowly growing facility in Vietnam)

 

I was the original covering analyst for Valuetronics 6 years ago, the first to call it's movement from 35 cents to 59 cents.

 

If you are a long term investor, you should consider buying some under $0.50.

 

EVEN with a financial crisis, I think it's still worth $0.60.

 

EVEN with a financial crisis and the uncertainty of further damage from COVID, it's still worth $0.55.

 

Of course, there is a chance the price of Valuetronics can go into a double bottom with the rest of the market. 

 

But here's what many people miss about all of this.

 

At this price of $0.50 as I write this, it's already trading at crisis valuations.

 

It has 42 cents net cash and doesn't need a bank to loan them anything.

 

It made about 8 SG cents earnings last year.

 

See their presentation here:

http://www.valuetronics.com.hk/ir/doc/2019%2011%2013%20-%20VHL%20-%202QFY2020%20Presentation%20slides.pdf

 

China's manufacturing HAS started again. So I don't expect total demand destruction. Maybe they drop manufacturing by 50% this quarter, and 75% next quarter. But maybe they can pivot and produce things that are needed in this COVID regime like components for medical equipment.

 

This is why their NET cash is so important, and should be given a bigger premium,

 

If you are a US or UK person, and you need to manufacture something with flexible demand with uncertainty, are you going to trust a company that is leveraged and might have a credit issue / liquidity issue, or a company that doesn't need the bank and can hold inventory for you / ramp up or down for longer periods of time?

 

Even if you are very bearish and but it's earnings by half or even a quarter, let's assume it makes 2 cents a year for 3 years (75% drop from last year).

 

That's still 4x PE ex cash with a very safe 4-5% dividend.

 

INVESTMENT POINTS:

 

1) Valuetronics is one of the few companies that has a safe dividend. In a world where everyone is fearful of a cut dividend, I doubt they will cut it. 

 

2) It has enough cash to outlast 4 years of a slowdown without a bank.

 

3) Future catalysts will be when they finally decide to acquire another company and all of a sudden, their earnings increase.

 

In a world where companies are over leveraged in a destroyed market, Valuetronics is sitting very pretty. When it's all over, they might also finally decide to acquire another business to grow their capabilities. They were trying to do so last year but it fell through. That was good luck for them!

 

Will the broad markets fall further?

 

Sure, why not? I give it a 70% chance of making a lower bottom.

 

But Valuetronics is already trading close to crisis levels, and has so much cash. The downside is limited. 

 

Conclusion: If you have a longer term outlook, one can consider this cash-rich company with good valuations at crisis levels.

 

Your friendly neighbourhood QuantZombie.

 

 

 

 

Disclaimer: 

This post is for educational purposes only. It seeks to allow people to see how some traders or investors think. This is not an encouragement to invest or trade. If you choose to do so, please consult your own professional financial advisor. 

 

 

 

 

 

 

 

 

 

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