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PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 16 Jul 2019, 8:56 AM

 

VS Industry Berhad - As Expected

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The Group reported a sequentially weaker net profit of RM31.4m (-17.3% QoQ) for 3QFY19, though largely within expectations as a reduction in demand had already been anticipated. Cumulative net profit of RM109.1m (+0.1% YoY) for 9MFY19, excluding a net foreign exchange gain of RM7.1m, is in line with our and consensus numbers at 77% of full-year numbers. FY20 will be lifted by recently secured work orders from Bissell, with a number of other new clients also reportedly on the cards. Our Trading Buy call is retained in anticipation of further contract wins in the coming months. Target price is raised to RM1.26 (RM1.10 previously) on a 17x multiple to FY20 EPS of 7.4sen, underpinned by a 2-year (2019 to 2021) CAGR of 22.5%. Separately, the Group declared a third interim dividend of 0.8sen for the quarter, bringing financial year-to-date payout to 2.8sen.

  • Revenue of RM889.7m for 3QFY19, down 9.5% QoQ, is reflective of a reduction in orders from a certain key customer in its Malaysian operations which had been previously communicated. Cumulatively however, 9MFY19 saw the highest revenue for the Malaysian operations as it benefited from higher orders from other customers. Malaysia continues to underpin growth, making up the lion’s share of Group revenue at 84%, with Indonesia and China still struggling to find their footing. Mass production for Bissell is on track to commence by 2QFY20, providing another lift to numbers with the estimated contract size ranging between RM500m and RM1bn annually.
  • Net profit of RM31.4m for 3QFY19 saw a more pronounced +43.1% YoY jump largely due to the absence of set-up costs for new lines that were incurred in the corresponding period last year. The 17.3% QoQ drop was a result of weaker revenue, reasons of which are mentioned above, as well as widening losses in its China operations, now made worse by further output reductions as a result of the US-China trade tiff. Cumulative 9MFY19 pretax losses in China are now RM33.6m due to significant plant under-utilization, weighing heavily on its overall profitability, and which may extend for another quarter or two.
  • Current developments. The Group continues to pursue opportunities arising from trade diversions out of China, with many multi-national company (MNC) brand owners actively looking to re-locate operations to the ASEAN region. While management remains tight-lipped on progress of these talks, we reckon one or two could be close to signing on. Estimated annual contract sizes could average between RM200m and RM300m. Capacity is of no question as the Group has readily-available production facilities to cater for potential new businesses, and a healthy cash pile to fund necessary capital expenditures.

Source: PublicInvest Research - 26 Jun 2019

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