By Kevin Tan
Thu, 11 Mar 2010, 08:50:45 SGT

Market research firm iSuppli recently projected for the global electronics contract manufacturing industry to rise by 7.8% in 2010, following a painful 13.4% decline in the previous year. In a separate report, we also note that the industry watcher is looking at resumption in revenue growth in the global consumer electronics market in 2010. We believe this will bolster an improvement in performance for Valuetronics Holdings (VHL) in FY11. VHL is currently trading at 4x FY11F EPS and 0.7x FY11F NTA, which in our view is undervalued. In light of the brighter outlook, we expect the stock to re-rate towards our fair value of S$0.19, or ~1x FY11F NTA. Moreover, VHL boasts an attractive FY11F yield of 7.5%, which brings the total potential return to over 35%. Maintain BUY.

Expected growth in contract manufacturing bodes well for Valuetronics. Market research firm iSuppli recently projected for the global electronics contract manufacturing industry to rise by 7.8% in 2010, following a painful 13.4% decline in the previous year. We believe this will bolster an improvement in performance for Valuetronics Holdings (VHL) in FY11. We note that the group had lately delivered a strong showing in 3QFY10 as expected, with revenue up 17.6% YoY and net income up 7.8% YoY due to continued restocking of inventories and additional sales from new ODM projects. Based on our channel checks with industry players, we see possibility in VHL surpassing our sales expectation of HK$268.3m (-8.0% QoQ) in 4QFY10 due to stronger sales in an otherwise seasonally softer quarter.

Positive on VHL’s potential to ride on market recovery… In a separate report by iSuppli, the industry watcher is also looking at resumption of revenue growth in the global consumer electronics market in 2010 and through 2013, after suffering its first annual decline in 2009 since the dot-com bust in 2001. One of the major drivers for the growth is said to come from increased sales in electrical appliances in emerging economies. With one of its major customers in the household appliances segment (where VHL provides ODM services), we remain hopeful of VHL’s potential to ride on the market recovery and improve its margins.

…though route to recovery is likely to be challenging. While we are positive on VHL’s performance in the coming quarters, we do acknowledge that its route to recovery is unlikely to be a smooth and effortless one. We expect some of China’s stimulus packages, such as pro-agriculture policy which aimed to stem rural to urban migration, to result in tight manpower supply in Guangdong province and in turn additional efforts on its manpower recruitment. More recently, we are also concerned about the impact the earthquake in Chile (world’s largest producer of copper) has on its operations. As such, we will continue to monitor the situation closely.

Maintain BUY. VHL is currently trading at 4x FY11F EPS and 0.7x FY11F NTA, which in our view is undervalued. In light of the brighter outlook, we expect the stock to re-rate towards our fair value of S$0.19, or ~1x FY11F NTA. Moreover, VHL boasts an attractive FY11F yield of 7.5%, which brings the total potential return to over 35%. Maintain BUY.