Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI), with a higher fair value of RM2.21/share, pegged to a higher rolled-forward FY22F PE of 17x (previously RM1.80/share pegged to a CY21F PE of 14x).

• The higher PE is in line with VSI’s 3-year historical average PE, due to the group’s positive growth trajectory supported by its position as a beneficiary from the US-China trade diversion. The group plans to secure a 400K sq ft factory to house potential job wins.

• VSI’s 4QFY20 came in above expectations at a core profit of RM67mil, bringing FY20 core profit to RM130mil after excluding one-off net losses amounting RM14mil mainly from impairment losses on PPE. The results exceeded both our and consensus’ full-year estimates by 39% largely due to better 4QFY20 results as order rebound for its Malaysia segment was much stronger than expected, likely due to stronger orders from VSI’s US customers’ which offset lower orders from its key UK customer.

• YoY: FY20 core profit dropped by 27% due to group revenue falling 19% largely due to factory closures impacting VSI’s Malaysian operations in 3QFY20 amid the movement control order (MCO) and wider losses from its Indonesian segment which were offset by narrower losses seen in China.

• Segmental analysis:
   
  • Malaysia: PBT slumped 31% as production was impacted by the MCO from 18 March 2020 till late April 2020 which had caused revenue to drop by 23% and was unable to offset fixed operating costs incurred. Furthermore, declines were also contributed by lower orders from its key customer as some products reached end-of-product life cycle.
     
  • Indonesia: An LBT of RM11mil was recorded as revenue fell 3% due to lower sales orders leading to underutilization of facilities, and also impairment loss on receivables and inventories written off amounting RM5.6mil as a customer ceased its business.
     
  • China: Revenue slid 26% due to less sales orders completed, but losses narrowed to RM24mil (vs. RM83mil loss in the previous year) on lower operating expenses following the group’s streamlining activities.
     
• QoQ: VSI’s core profit of RM71mil was boosted by a 75% increase in revenue as the previous quarter had been impacted by MCO-related factory closures.

• We remain positive on VSI’s diversification efforts and capacity expansion plan in preparation for additional opportunities to be secured by the group but deem that the market has already priced in the earnings growth at the current price. VSI’s positive prospects arise from: (i) sturdy box-build order growth supported by its key customers’ product launches; (ii) its ability to offer turnkey EMS solutions as a vertically-integrated player; and (iii) its efforts to diversify its customer base with potential opportunities to be secured from the US-China trade war.

Source: AmInvest Research - 29 Sept 2020