Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with unchanged forecasts and fair value of RM1.16/share, pegged to an FY20F PE of 14x.

• VSI’s 2QFY19 results came in within expectations at RM29mil, bringing 1HFY19 core net profit to RM80mil which accounts for 61% of our full-year forecasts and consensus estimates. Although the 1HFY19 contribution is slightly higher than 3-year historical average of 56% of full-year results, we consider the results to be in line as 2HFY19 is anticipated to experience lower sales order flow for a key customer in its Malaysian segment.

• 1HFY19 core profit rose by 4% despite a 6% decline in revenue as 1HFY19 core profit stripped off a net loss of RM2mil from net losses in forex and loss on disposal of PPE vs a one-off gain of RM10mil mainly from net forex gains stripped off in 1HFY18. Meanwhile, PBT declined 18% mainly affected by VSI’s overseas operations in China and Indonesia despite its Malaysian segment showing improvement.

• Segmental analysis:

• Malaysian segment improves: PBT rose 9% as revenue went up 7% amid higher sales orders from key customers.

• Indonesian segment affected by weakening rupiah and lower sales orders: Revenue declined 31% amid weaker sales orders whilst also recording an LBT of RM1mil vs PBT of RM5mil in the preceding year due to low utilization rates and the weakening Indonesian rupiah.

• China segment losses still a drag but VSI continues efforts to streamline operations: Revenue tumbled 47% YoY amid declining sales orders and as a large order was completed in 1HFY18 (higher base). The group recorded an LBT of RM24mil in 1HFY19 due to the lower revenue and continued underutilization of facilities.

• Although 2HFY19 will experience a softening order flow from one of its key customers in its Malaysian segment, revenue for FY20F onwards is expected to improve on the back of sturdy box-build order growth contributed by its new customer, Bissell, which has already been factored into our FY20F-FY21F forecasts.

• VSI is currently in various stages of discussion with multiple prospective MNC customers and is prepared to seize opportunities arising from the US-China trade war with its ready capacity in its 180K sqft factory.

• Maintain HOLD on VSI as we remain cautious of the unproven working relationship between Bissell and VSI but believe its positive prospects have been fairly priced in.

Source: AmInvest Research - 27 Mar 2019