Investment Highlights

• We downgrade our recommendation to UNDERWEIGHT from HOLD on V.S. Industry (VSI) with a lower fair value of RM0.80/share (previously RM0.83/share), pegged to an unchanged FY21F target PE of 10x following a recent run-up in its share price.

• We slash FY20F earnings by 19% to account for the impact of the movement control order (MCO) on its margins and reduce FY21F–FY22F forecasts by 3–6%.

• VSI’s 3QFY20 came in beneath expectations, at a core loss of RM15mil, bringing 9MFY20 core profit to RM63mil after excluding one-off net losses amounting RM1mil as forex losses were slightly offset by a gain on disposal of PPE.

• The 9MFY20 results accounted for only 50% of our full-year forecast and 56% of consensus’ estimates. The variation between the results and our forecasts is due to the worse-thanexpected impact of the MCO on VSI’s 3QFY20 earnings.

• 9MFY20 core profit plunged 38% YoY as a result of: (i) a 20% decline in revenue largely due to factory closures impacting VSI’s Malaysian operations following the enforcement of the MCO from 18 March 2020 whilst still incurring fixed costs; and (ii) wider losses from its Indonesian segment (Exhibit 2).

• 9MFY20 YoY segmental analysis:

• Malaysia: Revenue dropped 22% leading to a 44% decline in PBT as factory closures due to the MCO were unable to offset fixed operating costs incurred.

• Indonesia: LBT widened to RM4mil in 9MFY20 (vs. RM1mil loss in 9MFY19) despite revenue rising 4% due to a less favourable sales mix i.e. due to higher volume of lower margin products, underutilization of facilities, and inventories written off amounting RM3mil.

• China: Revenue slumped 33% due to less sales orders completed and disruption in operations due to the lockdown in China to combat Covid-19, but losses narrowed to RM10mil (vs. RM33mil loss in 9MFY19) due to lower operating expenses.

• Outlook: VSI expects to return to profitability in the next quarter, given that operations have resumed following the easing of MCO restrictions and is currently operating at full capacity. Amidst a challenging operating environment, order visibility has shortened whilst discussions with prospective customers are still halted due to travel restrictions. Meanwhile, recall that newer models of one of its US customer’s products had been delayed due to the MCO, but we gather that production has since started and is gradually picking up.

Source: AmInvest Research - 24 Jun 2020