Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with unchanged forecasts and a higher fair value of RM1.30/share (previously RM1.16), pegged to a rolledforward FY21F PE of 14x.

• VSI’s 4QFY19 core profit came in above expectations at RM73mil, bringing FY19 core profit to RM178mil. This is after stripping off one-off net losses amounting to RM21mil mainly from an impairment loss on PPE of RM22mil, loss on PPE disposal of RM5mil and loss on disposal of its subsidiary of RM3mil associated with its China operations, which was offset by RM10mil forex gains.

• The results exceeded our and consensus’ forecasts by a whopping 26% and 25% respectively. The deviation from the forecasts was mainly attributed to better-than-expected production efficiencies for its Malaysia segment.

• FY19 core profit jumped 15% YoY amid margin improvements seen for its Malaysia segment which were able to largely offset the worsening performance of its Indonesia and China operations. This was despite group revenue declining 3% and the higher effective tax rate of 36% seen in FY19 as losses of certain subsidiaries were unable to offset taxable profits in others, and certain non-deductible expenses incurred for tax purposes. Furthermore, FY19 core profit excludes the impact of a larger net loss of RM21mil vs. a net loss of RM4mil in FY18.

• On a QoQ basis, VSI’s 4QFY19 core profit rose 8% despite revenue increasing marginally due to better efficiencies achieved from higher sales orders from its key customers, despite the aforementioned impairment loss on PPE provided for its China segment.
• Segmental analysis for FY19:

o Malaysia: Sales orders increased 8% but PBT climbed by a proportionately higher 31% due to: (i) improvements in production efficiency arising from greater economies of scale as more assembly lines were running optimally; (ii) the absence of set-up costs associated with new lines which came onstream; and (iii) more favourable product sales mix.

o Indonesia: PBT declined 58% amid revenue falling 19% due to lower utilization rates at its facilities despite 4QFY19 benefitting from a better product sales mix.

o China: LBT widened aggressively as revenue plunged 44% amid the absence of large sales orders and as facilities remain underutilized. The segment was also impacted by one-off losses on disposal and impairment of PPE and termination benefits amounting approx. RM35mil.

• Update on Bissell production: VSI commenced mass production of its first line of water-based carpet cleaner mid-September 2019 with delivery starting on October 2019, thus contribution is only likely to be seen from 2QFY20 onwards.

• We reiterate out HOLD recommendation on VSI as the outlook for its overseas operations, particularly China, remains challenging while its positive prospects arising from expected stable growth of box-build orders from FY20F onwards from its key customers in Malaysia have been largely priced in. The key upside to the stock would be VSI securing additional orders and/or customers.

Source: AmInvest Research - 27 Sept 2019