PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 23 Jan 2020, 9:38 AM


VS Industry Berhad - Steady Performance

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VS Industry (VSI) reported a 1QFY20 net profit of RM48.1m (+20.8% YoY, -0.7% QoQ), the strong YoY jump aided by losses in China which narrowed significantly. The numbers are above our expectations at 31% of full-year forecasts, though in line with consensus at 27%. We leave our estimates unchanged at this juncture pending further clarity on its earnings stability. Revenue growth is lackluster, with 1QFY20’s RM1.03bn down 3.6% YoY and only up 0.4% sequentially, though we expect pick-ups in subsequent quarters on the ramp-up in production for its recently-secured contract. The Group also continues to engage with potential customers and stands ready with sufficient spare capacity to benefit from trade diversions. We still like VSI’s long-term growth prospects and keep our Trading Buy call in anticipation of new contract wins. Target price is left unchanged at RM1.49 based on 17x multiple to CY20 EPS of 8.7sen, underpinned by a 2-year (2020 to 2022) CAGR of 20.4%. The Group declared a first interim dividend of 1.0sen for the quarter, comparable to the previous year’s.

  • Revenue of RM1.03bn (-3.6% YoY, +0.4% QoQ) in 1QFY20, while not making significant headway growth-wise, is still respectable by any account. The Malaysian business (-0.5% YoY, -0.6% QoQ) continues to underpin Group performance, as its China operations remain shrouded by the trade tensions which has affected business sentiment there. China’s RM73.5m revenue is down 34.5% YoY and 5.3% QoQ. That said, the Group’s recent commissioning of its first Bissell line (in Malaysia) is on track for optimal production and more significant contributions from 2QFY20 onwards, providing a lift to numbers with the estimated contract size of at least RM500m annually.
  • Net profit of RM48.1m for 1QFY20 is up a more robust +20.8% YoY due to lower losses in its China operations and an RM7.9m refund of investment cost from an associate. The Group’s streamlining exercise in China over the last one year has resulted in significantly lower operating costs, though under utilization of capacity will continue to prevail however in light of the challenging operating environment there. Management believes its asset light strategy and lower-gearing structure stands it in better stead now nonetheless.
  • Current developments. Apart from the Bissell contract, the Group has not yet made notable headway in the securing of new customers as a result of trade diversions. Nonetheless, it continues to be in the fray with its readily-available production capacity on hand to benefit from the many multi-national company (MNC) brand owners still actively looking to re-locate operations to the ASEAN region. Our baseline earnings assumptions only account for works and contracts on-hand, thereby making FY21/FY22 valuations look relatively inexpensive should it secure a contract or two similar in size to Bissell’s.

Source: PublicInvest Research - 13 Dec 2019

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