Valuetronics FY2023: Lift Off continues. Earnings up. PE ex-cash of 2x. Upside: 20%++ (QuantZombie)
Results are good and better than the headlines.
Hi QuantZombie friends, 2H23 results did well, up +8.3% yoy.
Management reported YoY changes for the headlines but EPS 2H23 vs 2H22 was better than the earnings headlines. It's actually up almost +20%!
This also makes the 3rd consecutive half of increasing EPS.
Recall my bullish post on Valuetronics, 6 months ago:
Please refer to my last post on Valuetronics, where I wrote my thesis and where the upside EPS would come from. What occurred was in line with what I hypothesized, and there is more improvement to go!
On Nov 2022, I listed reasons why Valuetronics probably had an earnings bottom and probably a share price bottom as well. Valuation-wise, it had a 20% ++ upside, and I maintain my stance.
The four main points from the last post and the update were as follows:
1) More ICE clients in 2024 (management is confident there will be more). [This happened! They ramped up the 2 new ICE clients, and they secured another 2 for this year!]
2) Margins revert to normal (net margin 7-8% 2 years ago, vs 5.5% now) [NOT YET. Still an upside catalyst.]
3) Eventual revenue increases as demand returns. [CE Revenue still hasn't recovered. Still an upside catalyst.]
4) Automatic EPS and DPS increase due to share buybacks. [This happened, and they only spent ~60M HKD of their 250M HKD buyback]
Bonus: due to high-interest rates, their interest income doubles from $1M SGD to $2M SGD. haha. [Actually, their other income increased to 3.2M SGD (19M HKD)!]
1) Deeper recession next year. 2) More supply chain issues. (but it looks like it's improving)
Summary and Valuations
My thesis going into FY2024 remains the same.
Upside catalysts would be the 1) ramping up of the next 2 ICE clients they have recently secured. I estimate a 5%-10% EPS boost. 2) EPS increased due to continued share buybacks. 3) CE revenue recovers (although it's hard to tell when). 4) Margin improvements due to normalization of supply chain tightening (although it's hard to tell when might not happen this year)
Downside catalysts would be a worsening recessionary environment.
Valuation (at share price of 0.53 GSD)
Runrate PE = 9.9x
Runrate PE ex cash = 1.8x
Dividend per share = 20 HK cents, or 3.2 SG cents.
Dividend yield ~ 6%.
P/NAV = 1x.
Earnings and dividends should continue to grow steadily albeit with some cyclicality.
This is a deep value stock that looks like it may have made an earnings bottom.
Conservative Valuation: Reward outpaces the risks at this price. Suppose you price Valuetronics at its long-term PE of 11x (which some analysts did, even though Valuetronics' cash position has increased since, and the Vietnam campus is fully operational now). In that case, that's another 10% upside from here to ~ 0.60 SGD.
Optimistic Valuation: However, based on its 3rd consecutive half-yearly earnings increase, increasingly generous dividends, and a substantial margin of cash safety, and them being at the point where they are more liberal with rewarding shareholders with more buybacks and dividends, one could argue it should be slowly priced towards its historical average of PE ex-cash instead, which is around 4.5x (before COVID and pre-Vietnam expansion), which it eventually will drift towards so long as Valuetronics continues it's EPS increases.
This is the optimistic scenario, ~ 0.70 SGD.
The Reward-to-Risk is favorable at this price, and one can collect a very decent 6% dividend while waiting. Six months ago, based on discounted cash flow, I felt the analysts were too bearish. With stabilizing margins and better outlook (compared to 6 months ago) going forward, I won't be surprised if re-rates are coming.
Unless the economy deteriorates unexpectedly, Valuetronics earnings may have seen a bottom.
Take care everyone!