Wolf Money(Valuetronics)

Where do you look for value in this corrective market? Value(tronics) 😅. Joke aside, this company is indeed cheap on ex-cash basis. Valuetronics business revolves around EMS(electronics manufacturing services). The company has an insanely high 80% of its market capitalisation in cash. Lone Wolf likes companies with a lot of cash, as cash deposit become tailwind for earnings growth with risk free rate staying stubbornly high. On an ex-cash basis one is paying 10c for the whole business roughly 2x p/e. They earned roughly about 5c SGD(HKD 30c) a year. The dividend yield which includes special dividend is around 3.5c approximately 6.6%. They have a share buyback program to acquire up to HKD $250m about SGD $44m equivalent in shares. They are only 1/3 through their buyback. The buyback acts as a backstop for the share price. The HKD $1B net cash also helps reduce the downside risk.

Over the past 5 years, the company had went through tough times. From trade wars to covid 19. Revenue suffered as their customers moved away from Chinese manufacturers due to the high tariff imposed by America on Chinese made goods.

They had recently opened their Vietnam factory. The Vietnam factory allows their customers to diversify their supply chain outside of China. The strategy allows them to win 4 new customers which 2 of them are scheduled to contribute to FY24 revenue. With another 2 adding to FY25 revenue. 

I met Ricky, the Chairperson and Managing Director, about 15 years ago at the brokering house when he came for a roadshow. Valuetronic was still a very small company then with only two major customers. I find Ricky quite a hands on person. He took the trouble to explain Valuetronics business to a room of barely 5 people. Obviously, those days many of my fellow brokers find the company boring thus the poor turnout. The company was barely making HKD $650m in revenue then. Fast forward today, they are running on HKD 2B revenue a year with a more diversified customers base. If they continue their path of growth, the market will eventually notice them.

The undervalued status didn’t happened overnight. Share price had gotten cheaper over the last few years with the accumulated cash. Share is trading between a tight range of 50c-56c with exception of 2018 where a spike in interest sent the share ballistic to a high of $1.08. Share is trading at 0.9x price to book at the time of writing.

I am taking a small initial position to keep myself interested in the company’s development. They will be reporting mid-year result around mid November. Let’s see if their path of recovery continues.

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