• kennethkohwk

Update on Valuetronics: it's breaking out as we suspected!

Congrats to those that got in at the bottoming process of Valuetronics.


I shared a couple of times in the last 2 months that I thought Valuetronics was very undervalued and was in a bottoming process. It looks to be so.


Here was our posts, strongly disagreeing with the bearish analysts, recently on end May, which was pretty much the start of the bottoming process. Those analysts focused on the problems of Valuetronics and not their potential as well as how very cheap their valuation was. And, considering that Valuetronics never incurred a loss in the last 2 decades of business in any year (including through the 2009 GFC and the 2020 COVID crisis), I don't think Valuetronics should be trading with such a pessimistic valuation.


https://www.quantzombie.com/single-post/valuetronics-hk-start-of-the-share-price-turn-around


and


https://www.quantzombie.com/single-post/verdict-on-valuetronics-earnings-report-accumulate-it-s-cheap-and-bottoming


On a fundamental basis, the stock is still very undervalued and the margin of safety is very high. It makes take some time for the story to show obvious signs of a turnaround, but all the pieces for a turnaround are there... if not this year, then most likely next year. By turnaround, I mean earnings growth in the 10+%, but it's already trading at EV/EBITDA < 4.


For myself, because it's in a bottoming process, I don't think about quick capital appreciation, I think that it may be ranged bound for months, but eventually it's going to go higher and the downside is very limited (because the company has > 60% net cash).


This year, the company is likely returning back more than 10% to investors, but it's not obvious. It's likely around 5% dividend yield, AND they are buying back 20% of their shares (but not sure what the time frame is).


If you can hold this stock at these prices this is like a high-paying fixed bond that will eventually have capital appreciation.


On a fundamental level, it's not late at all to accumumate. In fact, it's cheaper than majority of the stocks out there especially considering that Valuetronics is a quality and highly regarded EMS company. The EMS sector is competitive, but Valuetronics has already carved out it's slow growing niche in it.



If Valuetronics gets through the supply chain glut, the rumblings of a weaker economy, and when they successfully court more US clients (now that their Vietnam expansion is up and running), it's not a stretch to see the Valuetronics price get back to above $0.80 again.


Maybe it takes 1 year or 3 years to get there, but you will enjoy at least a 5% dividend + capital appreciation on share buybacks in the meanwhile!


It's for the patient investor.


Cheers!

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