Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with a lower fair value of RM1.31/share (previously RM1.78/share) pegged to a CY19F PE of 15x. We have lowered FY19F–FY21F forecasts by 15-20% in anticipation of lower sales orders for one of its key customers in 2HFY19, following a conference call with management.

• VSI’s 1QFY19 results came in below our expectations at RM54mil, although accounting for 30% of our full-year forecasts and 26% of consensus estimates as we anticipate weaker quarters ahead. This is after stripping one-off net losses amounting RM15mil mainly from loss on disposal of its subsidiary and retrenchment costs related to its China segment, and net foreign exchange loss.

• 1QFY19 core net profit rose 35% despite a marginal increase in revenue after taking off one-off net losses of RM15mil vs. a net gain of RM2mil in the previous year. PBT declined 8% mainly affected by VSI’s Indonesia and China segments, despite improvements in its Malaysian segment.

• Segmental analysis:
  • Malaysia segment: PBT rose 7% amid a 9% expansion of revenue to a record high of RM887mil due to higher sales orders from VSI’s key customers.
  • Indonesia segment: On top of a 30% reduction in revenue, the segment recorded a LBT of RM1mil vs. PBT of RM4mil in the preceding year due to the weakening Indonesian rupiah.
  • China segment: Revenue continued to decline, dropping by 27% amid lower sales orders while LBT widened by approximately RM3mil as the suboptimal utilization rate impacted the ability to offset fixed costs. This was further exacerbated by a loss on disposal of a subsidiary amounting RM5.4mil in 1QFY19.
• Moving forward, prospects in 2HFY19 are expected to dampen due to expectations of declining order flow from a key customer for its Malaysian segment. On a more positive note, VSI is currently in serious talks with more than five prospective MNC customers to secure new orders that would fill up the excess capacity.
• The group also continues to undergo cost rationalization to streamline operations in its China segment in light of uncertainties from the US-China trade war, higher operating costs and intense competition.
• Maintain HOLD on VSI following the recent fall in its share price as we believe its prospects have been fairly factored in. Key upside risk to our outlook is the potential of securing new orders from prospective customers to fill up its additional capacity as its facilities.

Source: AmInvest Research - 17 Dec 2018