VS Inudstry Berhad - Strong Start Continues

Date: 31/03/2021

Source  :  PUBLIC BANK
Stock  :  VS       Price Target  :  3.04      |      Price Call  :  BUY
        Last Price  :  1.64      |      Upside/Downside  :  +1.40 (85.37%)

VS Industry (VSI) reported another strong set of quarterlies, sequentially, with 2QFY21 net profit of RM63.8m (+92.2% YoY, -4.3% QoQ) underpinned by strong Malaysian-based contributions and notable improvements in its Indonesian and Chinese operations. Cumulative 1HFY21 earnings are ahead of our and consensus estimates at 62% and 56% of full-year numbers respectively, the major discrepancy being better-than-expected operating margins. We lift FY21/FY22/FY23 net profit estimates higher by +7.8%/+2.6%/+4.3% to account for the margin improvements, with further upside likely to come from earlier-than expected line commissioning for its new customers which could potentially drive earnings higher. Our target price is consequently lifted to RM3.04 (RM2.97) on an unchanged 20x multiple to FY22 EPS. Our recommendation is raised to Outperform given its consistent delivery of better-than-expected earnings. A second interim dividend of 1.2sen was declared.

  • Revenue of RM999.3m (+21.8% YoY, +1.2% QoQ) in 2QFY21 is reflective of improved order flows from the Group’s new customers secured in the last two years. While the Malaysian segment continued to underpin growth, revenue in Indonesia jumped 72.8% higher YoY in the current quarter to RM105.2m due to higher sales order from a key customer in consumer electronics which experienced brisk demand following increase in work from home arrangements worldwide. Activity in China remained lackluster in the absence of large orders however.
  • Net profit of RM63.8m (+92.2% YoY, -4.3% QoQ) was driven by improved economies of scale as a result of better product mix from a more diversified clientele base. This is reflected in 1HFY21 gross and net margins improving to 13.1% and 6.6% (1HFY20: 9.7% and 4.4%) respectively. Operating losses in China also narrowed with lower expenses incurred following streamlining initiatives.
  • Outlook. With several new product models coming into production progressively over the coming quarters, the Group’s earnings visibility is assured for the foreseeable future. Based on existing order flows, present capacity is expected to be filled end-2021. Recall that the Group had also recently acquired land and properties for RM98.9m to cater for a new customer which appears to potentially be as large as the US-based one secured in March 2019 (revenue contribution: ~RM500m). Earnings prospects of the Group remain exciting, underpinned by 1) the US-based customer as mentioned above, currently already seeing order flows stronger than initially anticipated, and 2) Victory Inc., the Group’s most recently-secured customer which is seen to be contributing financially by 2HFY21, earlier than expected.

Source: PublicInvest Research - 31 Mar 2021

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