Results Highlights 

• V.S. Industry Bhd's (VSI) saw its 1QFY18 net profit surged 37.3% Y.o.Y to RM46.0 mln against RM33.5 mln in the same quarter last year, lifted by stronger revenue contribution, especially from its Malaysian operations and a net forex gain of RM2.5 mln. Meanwhile, quarterly revenue surpassed the RM1.0 bin threshold for the first time, coming in at RM1.09 bin, from RM680.0 min previously. The group has also declared an interim dividend of 1.5 sen per share, payable on 12th March 2018. 
• The reported net profit was lower-than-anticipated, accounting to only 16.6% of our previous FY18 estimated net profit of RM276.5 mln, although the reported revenue was within our forecast, accounting to about 23.9% of estimated full year revenue of RM4.54 bin. 
• The variation was mainly due to significantly weaker-than-expected performance from its China unit on higher raw material prices and increased consumption of raw materials used in pre-production testing for new products.  
• Going forward, VSI is expected to add capacity progressively, which will lift its revenue and earnings to greater heights. The group is also projected to grow at a strong double-digit five-year revenue and net profit CAGR of 25.6% and 41.3% respectively.

Prospects

VSI’s HK-listed subsidiary’s (VSIG) latest 1QFY18 results saw a wider 1QFY18 net loss at RMB24.0 mln vs. RMB8.5 mln previously, mainly due to seasonal effects and higher raw materials expenses. Consequently, the weaker results dragged down VSI’s overall performance, as VSIG contributes about 13.9% (FY17: 24.5%) of VSI’s revenue. Despite the short-term weakness, we expect improvements in earnings in the coming quarters, in-tandem with commencement of the mass production of new products.

A potential turnaround in bottomline could also be around the corner for VSI’s Indonesian operations (FY17 PBT: -RM5.1 mln), in the absence of a one-off impairment on factory building last year.

On the local front, the construction of the new factory adjacent to the VSI’s current production facility is on-track and is slated to be completed by mid-2018. Revenue, meanwhile, is foreseen to play catch up in 2HFY18 as new capacity from VSI’s assembly lines comes on-line progressively.

Downside risks include potentially lower orders for air purifiers following China’s aggressive stance on air pollution, thinner margins due to rising raw material prices and fluctuations in foreign currency.

In conclusion, we think that FY18 will be the gestation year amid the commencement of new assembly lines, as well as the mass production of new products, while the full revenue recognition from the new production lines will most likely be realised in FY19.

Valuation and Recommendation

Following the weaker-than-expected quarterly results, we trim our FY18 earnings and revenue forecast slightly by 0.3% and 18.2% to RM226.1 mln and RM4.53 bln respectively, on the back of lower contribution from VS International Group (VSIG) - VSI’s Hong Kong-listed unit and lower margins. Meanwhile, FY19 earnings and revenue are also trimmed to RM302.2 mln (-2.1%) and RM5.36 bln (-5.0%) respectively.

Nevertheless, we maintain our BUY recommendation on VSI with a lower target price of RM3.60 (from RM3.80) by ascribing an unchanged target PER of 18.0x to its revised FY19 diluted EPS of 20.0 sen. The ascribed target PER is at a small premium to its closest competitor, SKP Resources which we believe is justified in view of the group’s leading position in Malaysia’s EMS industry. The premium is also accorded for its wide array of supply chain services and established earnings track-record, as well as the potentially strong forward earnings growth on offer. Meanwhile, new contract announcements could be further re-rating catalyst.

Risks to our recommendations include: i) slower economic growth in the local and global environment that could dampen demand for consumer electronics, which would in turn lead to lower orders, ii) labour shortages which could significantly disrupt the group’s operations due to its labour intensive structure, and iii) higher raw materials prices, as well as fluctuations in foreign exchange rate.

Source: Mplus Research - 15 Dec 2017