PublicInvest Research

Author: PublicInvest   |   Latest post: Mon, 17 Jun 2019, 12:08 PM


VS Industry Berhad - Business Pressures

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The Group started off the new financial year on a lackluster note, with 1QFY19 net profit of RM39.8m (-7.1% YoY, +3.6% QoQ) missing estimates again, only making up 20.4% and 19.5% of our and consensus full-year estimates respectively. Difficulties in China weighed as under-utilization at its plants and a loss from disposal of a subsidiary contributed to a pretax loss of RM20.4m (before minority interests). Of greater concern is the company’s guidance of demand in its Malaysian operations tapering off. In line with this, we are making conservative cuts to our estimates, with revenue down an average 30% for FY19 to FY21, and earnings correspondingly cut an average of 41% in the same period as we assume weaker margins on lesser economies of scale. The resulting effect is a cut in our target price to RM0.97 (RM1.64 previously) based on CY19 earnings. Multiples are kept at 15x nonetheless in anticipation of new contract wins though we caution for near-term downsides from the lackluster numbers reported and the less-than sanguine guidance offered. Our call is lowered to Neutral. Separately, the Group declared a first interim dividend of 1.0sen for the quarter.

  • Revenue of RM1.1bn (+0.4% YoY, +6.4% QoQ) for 1QFY19 was driven by steady contributions in its Malaysian operations (+9.4% YoY, +10.7% QoQ). Indonesia and China floundered however, both contributions down 30.0% and 26.1% YoY respectively. Of some grave concern is the expectation of weaker job flows in subsequent months based on latest production volume forecasts from its customers (in Malaysia), a situation we have addressed accordingly with cuts to our estimates. Conditions in China also appear to be difficult amid uncertainties surrounding the US-China trade tiff as intense competitive pressures are also weighing on prospects. Management anticipates an extended period of under-utilization in its Chinese plants.
  • Net profit of RM39.8m (-7.1% YoY, +3.6% QoQ) for 1QFY19 was marred by an RM5.4m loss on disposal of a subsidiary in China and RM6.4m net foreign exchange loss. We gather the Group’s counter-measures in addressing its current situation in China may also have involved some rationalization costs, all of which contributed to a pretax loss of RM20.4m during the quarter. Indonesia’s RM1.3m pretax loss was largely the result of a weakening Rupiah, though lackluster job flows also contributed.
  • On-going developments. In mitigation of expected earnings losses, the Group is stepping up its efforts in securing new contracts from other MNC customers to fill up excess capacities. We understand there could be as many as 5 prospects, all of which are at various stages of discussion. We are cautiously optimistic that the Group should be able to clinch 1 or 2 of these prospects, at the very least, but keep our optimism in check given recent (and constant) disappointments.

Source: PublicInvest Research - 17 Dec 2018

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