Update on Valuetronics FY2020 results.

June 3, 2020

Update for Valuetronics for those who had some.


Recall that I mentioned that Valuetronics was "worth at least 60 cents" and that the extent of how sales will be impacted will determine how much more it is worth. Last week, Valuetronics got close to 70 cents before selling down to 63 cents after results.

 

How do you think about it now?

 

TL:DR: It's a cheap cash rich company that is in consolidation. Price is unlikely to take off until that shake the specter of US distrust of China. They can do so by developing their Vietnam manufacturing site, but that will go into mass production at least 12 months later. In the mean time, although they have a big cash horde and have strong management, this coming year's earnings will be less than last year due to lower demand. They also have a US client that indicated that by 2022 they will diversify some of their production away.

 

For those who bought it at 50 cents, you might take some profit if you find better things to invest in... there are quite a few laggards around. Just read my last couple blog posts ... those laggards are only recently taking off. SPG. STOR. IHRT. OEC.

 

Or, you might want to keep it for dividends, it's backed by a tremendous amount of cash. I expect Valuetronics to bounce between 58 and 70 cents until there is more clarity of the Vietnam progress and demand recovery.

 

I just got off the analyst call as they reported earnings.

 

Here is my 2 cents.


1. Full-year Net Profit only down 10%. They made 6.8 cents a share for last 12m. Their cash horde continues to increase to 44 cents a share now.


2. However, most of that 10% drop was due to the last quarter. Because they report every 6M, I cannot parse out exactly how much is due to last quarter, but I estimate that last quarter was probably down 40%-50%.


3, The "good news" is that this effect is due to both lower demand and supply issues. For supply issues, many workers who returned back from CNY had to be quarantined for 40 days! That's almost a month and a half. So, I expect an improvement for this in the coming months. I will estimate that this year, once labor is fully back, I think earnings drop by 25% you for this coming year.


4. The bigger story is US trade wars. I mentioned more than once that this was more of a concern for Valuetronics than COVID. But, COVID accelerated the distrust of China. So, I view Valuetronics as being fairly valued in the near future and you should keep your eyes on this stock in the year ahead.

 

Because:
a) Earnings will drop this year as clients still have to recover in demand but also that some clients want to diversify away from China. 1 client indicated that they will do so by 2022.


b) However, Valuetronics is in process of developing a large manufacturing site in Vietnam. They also estimate mass production by 2022. Once this happens, Valuetronics will be in the same position 2 years ago, where they are in favorable situation to court US clients again. Valuetronics is well-run, proven track record with notable clients with a giant cash horde. The cash horde attracts more clients because they do not need any liquidity from the bank and can be very flexible in their supply chain.


c) Assuming that conservatively make only 4 cents a share this coming year, 5x PE ex cash would give it a target price of 64 cents, Which is where it is now. However, 4 cents a share is pessimistic, it is likely to do a bit better. At the same time, valuations is cheap and you will still be getting good dividends. But, the spectre of trade war will be on the company for the year and will only fade away when the Vietnam facility is up and running, and there is a showing of trend that clients are using it.
d) So based on the information I see so far, this year, I regard Valuetronics as a cheap cash-rich company that is a dividend machine but has no growth story until 9 months later. It will probably bounce between 58-70 cents unless new information comes out.


e) those who bought it at 50 cents when I first alerted can choose to keep for dividends or take some profit.


Cheers!

 

 

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