Valuetronics kept at 'buy' by Maybank given PCBA allocation risks are priced in

SINGAPORE (Mar 21): Maybank says Valuetronics’ stock has already priced in the drop in PCBA (PCB assembly) sales if customers decide to switch suppliers due to the China-US trade war.

Valuetronics’ PCBA business is the next most vulnerable after smart-lighting as entry barriers are low. Its Dutch MNC customer also has strong means to tweak its supply chain.

Its ICE (Industrial and Commercial Electronics) revenue, at 60% of its FY19E total, is stickier, given greater value-add from design involvement; qualification processes and lower volumes than its CE (Commercial Electronics) segment.

In addition, Valuetronics can defend ICE allocations as it begins Southeast Asian production in FY20E for customers intending to diversify their production bases from China.

To measure the downside of a drop in PCBA sales, Maybank analysts are assuming an aggressive 50% cut in Valuetronics’ FY20E PCBA sales.

“Our simulation suggests that its revenue/PATMI could fall 16%/10% y-o-y in FY20E if its PCBA allocation drops by a hefty 50%,” says Maybank analyst Lai Gene Lih in a Wednesday report.

This contrasts its current forecast of flat y-o-y earnings, assuming its ICE momentum can offset reduced smart-lighting allocations.

Prospective yield would also drop to 5.9% from current 6.4% but there is still an “attractive” 41% upside to its fair value outcome of 98 cents, which is 7% lower than current target price of $1.05.

In its simulation, Valuetronics’ earnings would also drop less than revenue as PCBA is less profitable than ICE.

“While near-term overhang may persist due to allocation worries, we see potential catalysts from clarity of international expansion plans and resilient ICE volumes,” says Lai who is keeping its target price unchanged at $1.05 based on 2.1x FY20E P/BV.

Downside risks include unexpected allocation losses within ICE, and weakness in end-market demand due to adverse economic factors.

As at 12.44pm, shares in Valuetronics are up 1 cent at 70 cents.