Investment Highlights

• We upgrade our HOLD recommendation on V.S. Industry (VSI) to BUY with a higher fair value of RM1.48/share (previously RM1.27/share), pegged to an FY21F PE of 14x.

• We have raised our FY20F–FY22F earnings forecasts by 9–17% after lowering our operating expense assumptions on account of cost savings and narrower losses from its China operations.

• VSI’s 1QFY20 core profit came in above expectations at RM50mil. This is after stripping off one-off net losses amounting to RM2mil mainly from net forex losses of RM2mil which were slightly offset by disposal gains on PPE. The results accounted for 32% of our full-year forecasts and 29% of consensus’ estimates. We note 1Q is usually a seasonally stronger quarter for its key customer, Keurig, which contributed around 13% of our revenue estimates in FY19.

• On a PBT level, margins improved by 20ppt YoY in 1QFY20 due to smaller losses from its China segment, coupled with the absence of loss on disposal of subsidiary of RM5.4mil in 1QFY19. After adjusting for one-off items, 1QFY20 core profit declined 3% YoY in tandem with group revenue falling 5% YoY, mainly due to lower revenue contribution from its China segment.

• Furthermore, 1QFY19 core profit was adjusted for higher oneoff net losses of RM12mil due to RM6mil forex losses and aforementioned loss on the disposal of its subsidiary. The group paid a lower effective tax rate of 27% in 1QFY20 vs. 37% in the previous year’s preceding quarter partly due to narrower losses seen in its China segment. Moving ahead, the effective tax rate is expected to be slightly higher than 24% due to lower capex guidance for FY20F of around RM60mil, which we have already imputed in our assumptions.

• YoY segmental analysis for 1QFY20:

• Malaysia: PBT fell 2% as revenue declined by 1% due to slightly lower sales orders from its key customers. VSI’s Malaysia segment contributed 86% of group revenue in 1QFY20.

• Indonesia: A PBT of RM1mil was recorded vs. LBT of RM1mil in the previous year due to better product sales mix, despite 7% lower revenue.

• China: Despite revenue plunging 34% due to lower sales orders, LBT narrowed by RM17mil as a result of lower operating expenses as a result of the group’s restructuring efforts, which minimized costs and downsized operations, and amid an absence of loss on disposal of subsidiary of RM5mil in 1QFY19.

Source: AmInvest Research - 13 Dec 2019