Verdict on Valuetronics earnings report: Accumulate. It's cheap and bottoming.

Hi friends,

Valuetronics reported earnings premarket today.

I wanted to rush this quick take out before any significant price movements and before any of the analysts report.

TL: DR

The earnings was to my model's expectations. Earnings looks like it's going to find to bottom between now and next half. It's cheap on a long-term basis and is very close to deep value territory. Major CAPEX for Vietnam done. All US clients that had to leave because of US-China trade war already gone. All there is left is survive the component shortage and higher wage costs, and a slight recession going forward as they are free to agressively approach new clients (Vietnam operational).

With a 12x PE runrate at these close to "bottoming" earnings. Net cash making up 70% of market cap. With 3 new ICE clients (out of 8) going to contribute earnings in FY2023, and being paid ~5% annual dividend while you wait, it's hard to find such a large margin of safety stock in today's market.

My Quick Take:

Valuetronics reported. Net profits, Net Margins, Revenue are almost the same as 1H22. This implies Valuetronics is in the process of making an EARNINGS bottom... except they will recognize 3 new clients this year!

This makes it easier to value the company compared to 6 months ago.

Based on this 2H22 results, PE = 12x. PB = 1. Net cash is 71% of market cap. PE ex cash = 3.5x. The dividend to be received soon is 10hk cents which is 3.4% dividend for this half.

Verdict: it's cheap and the price of the stock is likely to find a bottom before the next earnings annoucement.

Market sentiment is still jittery, but I would accumulate for a long term holding... especially if the price drops further. Some people might be spooked by the lower margin and sell off, but I think the open field to grab more clients offset this while the earnings tries to find a bottom.

If you are a technical trader, you might want to wait until the downtrend is broken, OR, there is a sharp capitulation and reversal.

There are some uncertainties, but less than 6 months ago.

CE revenues are expected to drop slightly next half due to weakening demand, but 3 new ICE clients (out of 8 now) should more than offset that since ICE makes 3x more profit than CE.

Some uncertainties to margins and demand exist but less so compared to the last half of the year, but I think it's a small win that net profits are the same as last half. Gross margins are down but offset by cost controls. CE margins dropped compared to last half. Last half already saw dropped margins. Not nice to see more margin drop. ICE margins decreased slightly. However, Valuetronics maintained their net margins by dropping admin and marketing expenses.

It's possible that net earnings might deteriorate a little more, but it seems that a bottoming in earnings is taking place.

The way I look at Valuetronics now is that when margins snap back to normal, the stock is likely worth 30%-40% more. But, there is the short-term pain of increasing costs that might impact margins for 6m? 1yr? 2 yr? but you get a 5% dividend while you wait and feel safe knowing that Valuetronics will never go bankrupt and can pay dividends and share buyback.

It's like a high-paying fixed deposit with a capital appreciation upside of 30%+ in 1-3 years' time.

Here are some of the significant slides from their earnings presentation: