- kennethkohwk
Valuetronics’ net profit rose 42% 1H24 vs 1H23. Deep Value and Turning the Corner. 20%++ upside.
Valuetronics turned out a great earnings report and we have been expecting this for a year.
On the news, the stock price popped and couldn't find traction.
In this post, we list the reason why and reiterate this stock is deep value and long-term investors should definitely consider accumulating this on any weakness for their portfolios.
We agree with Paul Chew of Phillip Securities that Valuetronics is worth at least $0.61 a share TODAY, and can be worth, eventually, to $1 a share when the macro finally (12-24 months?) starts an upcycle like the previous and if Valuetronics can continually and successfully implement their strategies of buy backs, history of new client growth and good business execution.
Valuetronics POPPED even when Venture was down.
Macro weakness caused Valuetronic's big brother EMS, Venture, to report diminishing earnings a week before. This likely spooked investors even more about Valuetronic's prospects.
Instead, Valuetronics reported an eye-popping outperformance! Their 1H24 net profit rose 42% instead!
This caused the stock price to pop temporarily, only to end the day flat. We think this selling is uncalled for based on Valuetronic's deep value valuation, impeccable balance sheet, the company's readiness to return cash to shareholders, and that Valuetronics is NOT done in their cycle up, altogether the next 6-12 months might be a little muddy.
We anticipated this a year ago.
We anticipated the the reason why earnings surged in our blogpost 1 year ago, where we covered reported a bullish sentiment way before other analysts did. See our post Valuetronics: Ready to launch. 20%++ upside. dated Nov 12, 2022.
In that report, we listed 4 catalysts waiting to occur to either help boost margins and EPS or cause a rerate. This is the exact summary of that post:
Upside Catalysts:
1) More ICE clients in 2024 (management is confident there will be more).
2) Margins revert to normal (net margin 7-8% 2 years ago, vs 5.5% now)
3) Eventual revenue increases as demand returns.
4) Automatic EPS and DPS increase due to share buybacks.
Bonus: due to high-interest rates, their interest income doubles from $1M SGD to $2M SGD. haha.
Downside Catalyst:
1) Deeper recession next year. 2) More supply chain issues. (but looks like it's improving)
What happened?
So what happened in the last half for valuetronics?
1. Valuetronics had a slow down in overall revenue due to macro demand, but it was offset by 1) more ICE clients in 2024!
2. Valuetronics Gross Margins improved by a good 15% hoh because their supply chain constraints and wage/inflation pressure started to normalize. Their NET margins improved by a whopping +36% from 6.8% to 9.2%, much more than the 15% gross margin increase. The reason might surprise you.
We have been beating the drum that Valuetronics had a lot of latent value due to the net cash build up, and the increasing INTEREST RATE environment increased the value of that cash. Their interest on their deposits risen from $5M hkd a year ago to $25M hkd now. This cash cannot be ignored in Valuetronic's valuation.
Because of this good result, Valuetronics annouced a special dividend of 0.04 hkd per share on top of their interim dividend per share of another 0.04 hkd. If we look at 2H23, they paid a 0.06 hkd per share special dividend and a 0.1 hkd per share final dividend. If you add them all together, their last 12 months dividend is 0.24 hkd per share or 0.042 sgd per share.
Based on today's closing price of 0.535 per share, that's a whopping 8% dividend that is fully covered by earnings.
In fact, it's PE ex cash or EV/EBITDA based on this half's annual runrate is < 1, because Valuetronic's net cash position has grown to 80+% of it's market cap.
A good way of viewing Valuetronics is like buying both a BOND (because it has lots of cash bringing in interest) and a EMS company that is trying to offset shaky macro with onboarding ICE clients and an improvement of margins. Note that in the last 20 years, even through the GFC in 2009, Valuetronics has never put up a loss-making year.
An EV/EBITDA of ~1 (with high cash flow and a commitment to share buybacks and dividends) can make this stock an easy candidate in one's diversified stock portfolio.
...
What's holding it back?
The market is afraid of the macro, and Valuetronic's management has already cautioned that in the next 6 months, their rate of onboarding new clients might not offset the demand shrinkage.
The cautious statement (remember that management is always cautious in their signalling) is "in the short term, their revenue contribution may not fully compensate for the decline from existing customers doe to the global economic slowdown."
I can accept this uncertainty, but our opinion is that on a discounted cash flow basis, the valuation has more than discounted this possibility. We might have an earnings drop next half, but the rewards when recovery finally comes will be high.
Recall the potential catalysts:
Upside Catalysts:
1) More ICE clients in 2024 (management is confident there will be more).
2) Margins revert to normal (net margin 7-8% 2 years ago, vs 5.5% now)
3) Eventual revenue increases as demand returns.
4) Automatic EPS and DPS increase due to share buybacks.
Even in this "partially recovered state", 1), 3) and 4) are still potential upside catalysts. What happens when macro ACTUALLY recovers to old highs? Valuetronics has still approximately 15% or so of market cap of share buybacks that are still in their schedule.
Let's assume 2024 is muted or maybe EPS drops by 10-20%, when the recessionary forces abate, and margins and demand start recovering, Valuetronics could easily be worth $1 a share.
Marketing Timing is still a thing. Caution is understood.
Even though on a probabilitic level, Valuetronics is likely trading way below it's Intrinsic value, market timing is still something that cannot be ignored.
While most are still waiting on the impact of the FED's stance on interest rates, and if there will be a soft or hard landing next year (which dovetails into Valuetronic's being cautious about existing client demand); it forms a basis for choppiness and volatility in the share price.
However, we still think that many people do not understand Valuetronics because it is undercovered and in the last 2 years, analysts have been overly bearish. Eventually, we believe the market will discover it's value, the question is when.
So far, only one analyst has turned bullished recently.
We agree that even at this point, Valuetronics is easily worth S$0.61 a share, and then macro and demand starts normalizing to previous upcycles, coupled with it's share buybacks, continually onboarding of clients, it can easily get back to $1 a share. The question is how long will it take. 12 months? 24 months? Maybe even 36% months?
In the mean time, enjoy an 8% dividend that is covered by earnings and overwhelmingly covered by it's warchest of cash.
We find it hard to find other companies that had this kind of valuation with such a big degree of safety in the present climate.
We think that so long as bond yield don't make new highs, and the war doesn't escalate into something bigger, it's likely markets have support till year end.
Please have a great end of the year, don't forget your loved ones and the One that loves you the most.
Stay Safe!
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