Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with an unchanged fair value of RM1.16/share, pegged to an FY20F PE of 14x. We keep our forecasts unchanged as we anticipate 4Q to register a similarly weak profit as 3Q based on the group’s current order visibility.

• VSI’s 3QFY19 core net profit came in at RM22mil, bringing 9MFY19 core net profit to RM102mil after stripping off one-off gains mainly from forex amounting RM7mil. The results account for 78% of our and 77% of consensus’ full-year estimates.

• The strong 9MFY19 results were attributed to better performance seen in 1HFY19, but we consider the results to be in line as 2HFY19 is anticipated to experience lower sales orders from a key customer in VSI’s Malaysian segment.

• 3QFY19 core net profit dropped by 22% QoQ as revenues fell 10% due to lower sales orders from a key customer in its Malaysian segment, as well as continuously declining sales from its Indonesia and China segments. Its Indonesia segment PBT improved 8% QoQ despite lower revenue due to a change in product mix, but its China segment losses widened due to continued suboptimal utilization of its facilities.

• 9MFY19 core net profit rose 17% YoY relative to 9MFY18’s lower base after stripping off a higher forex gain of RM22mil in 9MFY18. Meanwhile, net profit grew marginally by 0.1% as losses from its China and Indonesia segments were offset by higher profits from its Malaysia segment.

• Segmental analysis for 9MFY19:

o Malaysia: PBT soared 20% as higher sales orders boosted revenues by 7% and as productivity was boosted by production lines running optimally and an absence of set-up costs associated with new lines which were incurred in 9MFY18.

o Indonesia: Revenue fell 25% while a cumulative LBT of RM1mil was recorded as profits gained in 2QFY19 and 3QFY19 were unable to offset losses incurred in 1QFY19 which suffered from lower sales and the weaker Indonesian rupiah.

o China: The segment recorded an LBT of RM34mil in 9MFY19 vs. PBT of RM5mil in 9MFY18 as sales dove 43% in the absence of a large order completed in 9MFY18 and as facilities remained underutilized.

• Firm on position as a beneficiary from the US-China trade war: VSI continues to engage with prospective customers after receiving enquiries from MNCs wishing to shift their manufacturing bases from China to Southeast Asia, with its Malaysian operations being one of the choice locations due to the group having its 180K sqft factory which is targeted to be ready by yearend CY2019.

• We reiterate our HOLD call on VSI despite expecting stable box-build orders growth from key customers in its Malaysian operations FY20F onwards, the challenging outlook of its overseas operations continue to plague the group’s performance. We believe that its prospects have been largely priced in, with a key upside risk being the securing of additional orders and/or customers in CY2019.

Source: AmInvest Research - 26 Jun 2019