In 9M19, earnings came in 2.6% lower y-o-y at HK$153.7 million.
See: Valuetronics posts 3Q earnings up by 2.6% to $10.3 mil despite dip in revenue
Following the results announcement, RHB Research has downgraded its call on Valuetronics to “neutral” from “buy” with a target price of 78 cents.
Despite the group reporting a decent 3Q19, analysts say Valuetronics' smart lighting segment will likely continue to face pressures.
In a Thursday report, analyst Jarick Seet says revenue will be impacted by 7-10% given that the company is missing out on US orders for a new generation of smart lighting – which forms a significant chunk.
Nonetheless, the group’s industrial and commercial electronics (ICE) segment is likely to remain its biggest growth driver, with the automotive segment likely to continue growing at high double digits y-o-y and margins being stable due to higher volumes and efficiencies.
In addition, its sensing and printer segments will likely also continue to grow in 4Q19, on new projects secured.
“That said, we expect management to continue rewarding shareholders with respectable dividends due to its strong net cash position and cash flow generation,” says Seet.
“Investors can hold the stock for upcoming year-end dividends in the short- to mid-term,” adds Seet.
Similarly, CGS-CIMB Research is downgrading its recommendation on Valuetronics to “hold” from “buy” with a lowered target price of 73 cents from 93 cents previously.
While inventory level at its wireless lighting customer has normalised and sales recovered 60% q-o-q, the group’s consumer electronics (CE) revenue was flat q-o-q and 26.4% lower y-o-y at HK$295 million. The weaker demand is partly attributed to its customer’s de-risking plan, as reconfiguration of their global supply chain has led to the group missing out on a major portion of their new product roll-outs.
In a Wednesday report, analyst Ngoh Yi Sin says, “If this accelerates, we see potential earnings risk for FY20-21F.”
Driven by ongoing US-China trade tensions, the group is seeking to diversify its manufacturing footprint outside of China. Management views partnerships as the most cost-effective option for presence in Southeast Asian countries.
Meanwhile, the group’s net cash of HK$755 million would be useful for potential merger and acquisition (M&A) opportunities in North America.
On the other hand, Maybank Kim Eng has kept its “buy” call on Valuetronics with a target price of $1.05, due to the group’s attractive dividend yield.
In a Wednesday report, analyst Lai Gene Lih says, “At 10-15% of revenue, smart lighting is expected to weaken further as Valutronics recently lost US geography allocation for the new generation of its customer’s smart bulbs, as the customer diversifies production away from China due to the trade war.”
Nonetheless, ICE revenue increased, backed by continued growth in automobile and printing. Management remains optimistic, adding that ICE customers generally have higher switching costs than CE, due to greater design involvement by VALUE; and entry barriers like qualification processes for certain customers.
The group expects to start production in Southeast Asia this year for customers keen on diversifying products from China. It also reaffirms its US expansion plans.
So far, the direct impact of the trade war has been immaterial, although management has cautioned that indirect effect may include margin pressures and/or loss of customers.
“In addition to this, we see risks from slower than expected business momentum as a result of the trade war,” says Lai.
As at 11.45am, shares in Valuetronics are trading at 69 cents or 1.6 times FY19 book with a dividend yield of 5.5%.
