2 Electronic Stocks That Have Been Unfairly Hammered By The Market

With the ongoing trade feud between China and the United States, market participants have been selling down stocks that they think may be affected. This includes the manufacturing stocks such as Venture Corporation Limited (SGX: V03) (42% down its peak), AEM Holdings Ltd (SGX: AWX) (-42.7%), Valuetronics Holdings Limited (SGX: BN2) (-38%) and Micro-Mechanics (Holdings) Ltd (SGX: 5DD) (-25.4%).

The tax on exports will most certainly have an impact on the companies that have their factories located in China and whose direct customers are from the United States. However, some of the sell-down may have been massively overdone. Therefore, I think this might represent a perfect opportunity to buy some of these electronics manufacturers on the cheap.

With that, here are two companies I feel could have long-term growth potential at current valuations.

Company 1: AEM

AEM mainly produces test handler systems for the manufacturing of semiconductors. The company had nothing short of an incredible 2017 when it reported a 216% and 576% spike in revenue and profit respectively. The large increase in its sales was due to the rollout of its new test handler system, which was co-developed with its largest client.

The new test handler system has faster throughput and lowers the cost of testing by around 50% to 80% as compared to other test handler systems. This gives AEM a technological edge over its competitors.

Furthermore, in April, AEM announced that it has already secured sales orders of S$192 million for FY2018, which is 29% higher than what it secured at the same time in 2017. The company has also forecast that it will deliver at least S$42 million in operating profit before tax. This gives it net profit after tax of S$34.8 million, which is 10.7% higher than its already impressive 2017 results.

The company expects to continue selling its test handler system to its major client along with any reusables and kits required to operate the system, providing the company with recurring income from the sale of the reusables.

Due to the recent sell-off, AEM now trades at a price-to-earnings multiple of just 7.9 at its share price of S$1.08. With its good relationship with its key client, stable order book and growth potential, it could be a good opportunity to invest in the company.

Company 2: Valuetronics

Valuetronics, a Hong Kong-based company, provides a range of electronics manufacturing services. It operates in two many business segments, namely, consumer electronics and commercial electronics.

Between FY2013 and FY2017 (the firm has a 31 March year-end), Valuetronics recorded growth in all key areas of its business, including revenue, gross profit and net profit. In FY2018, the group continued to deliver strong growth with revenue hitting a record high of HK$2.85 billion, 25.4% higher than the previous year. Net profit attributable to shareholders also grew 32.9% to HK$204.7 billion.

In his statement to shareholders, group chairman and managing director of Valuetronics, Tse Chong Hing, said that the Internet of Things (IoT) megatrend is rapidly growing, providing the company with new opportunities and demands from consumers, companies and government. As such, he believes that with Valuetronics’ engineering expertise, the company is well placed to ride on the trend to explore more business opportunities going forward.

Valuetronics is also actively pursuing technological enhancements to its manufacturing processes to save on manpower and energy costs. In 2017, the group initiated the auto insertion and selective soldering technology in the manufacturing of automotive products, which reduces labour dependency, and improves consistency and quality.

After the sell-off, Valuetronics trades at S$0.68 per share. This translates to a low price-to-earnings multiple of 8.4 and a tasty dividend yield of 5.7%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on AEM Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in AEM Holdings Ltd.