Softer FY09 earnings as guided. Valuetronics Holdings Limited (VHL) reported softer FY09 earnings amid a challenging March quarter, consistent with its profit guidance a month ago. Revenue fell 22.3% YoY (-35.7% QoQ) to HK$159.3m in 4QFY09, while bottom-line swung into the red with HK$2.7m loss from HK$19.7m profit in 4QFY08 (3QFY09: HK$12.5m profit), due mainly to an allowance for doubtful debts of HK$8.7m and goodwill impairment of HK$4m arising from the recent acquisition of a Medical Equipment (ME) manufacturer in March 2009. For FY09, the group's performance was also affected by higher operating costs, forex loss of HK$3.7m, and a one-off charge of HK$10.0m asset impairment due to flash floods in June 2008. As a result, despite an 8.6% growth in FY09 revenue to HK$960.0m, earnings declined 41.4% to HK$53.1m. Excluding this one-off loss and the goodwill impairment provision, profit before tax would have dropped by 26.6% to HK$73.6m. Nevertheless, VHL maintained its 30% dividend payout by proposing a final cash dividend of HK4.5 cents (~7% dividend yield).

Outlook remains challenging; positioning for new business opportunities. Based on regular updates from customers, VHL is expecting FY10 to remain challenging and the sentiment among its customer to remain cautious. While the group has seen pick-up in orders in recent weeks, demand patterns stay highly uncertain as its customers aggressively keep their inventories lean. Furthermore, it has to contend with price pressures, deteriorating credit conditions and significant fluctuations in currency exchange rates. As such, VHL said it will continue to strengthen its working capital and cost containment efforts, while carrying on its business development strategies to capture new business opportunities. The acquisition of the ME manufacturer, as mentioned above, is one such example that has enabled the group to tactically gain immediate access to the medical market and new avenues in the ME sector.

Reiterate BUY. With healthy balance sheet (HK$153.5m cash with no borrowings), strong operating cash flows and excellent management, we believe VHL is well-positioned to take on business opportunities as these arise. However, as the global economy is unlikely to show any dramatic recovery in the near term, we have prudently reduced our FY10F forecasts by 15-27%. Applying 6x (4x previously) FY10F EPS alongside a re-rating in the sector, our fair value is now raised from S$0.15 to S$0.17 (36% upside potential). Maintain BUY on VHL.