Results Highlights

• V.S. Industry Bhd’s (VSI) 3QFY18 net profit more than halved to RM21.1 mln, from RM50.5 mln last year, owing to weaker performance across all of its business segments amid high input prices and labor costs. Meanwhile, a significant earnings reduction from a key customer due to the discontinuation of several models that have reached the end of their product lifecycle also hit the group’s bottomline in the quarter under review.

• Revenue, however, grew marginally by 3.0% Y.o.Y to RM879.8 mln, from RM854.1 mln in the previous corresponding period. The group has also declared a third interim dividend of 0.5 sen per share, payable on 31st July 2018. Cumulative dividend per share to-date is 3.5 sen, compared to 3.9 sen last year.

• Cumulative 9MFY18 net profit, meanwhile, narrowed 6.0% Y.o.Y to RM112.3 mln, from RM119.5 mln previously, dragged down by weaker margins attributed to the aforementioned reasons, although revenue jumped 34.0% Y.o.Y to RM3.08 bln, from RM2.30 bln in 9MFY17.

• VSI's 9MFY18 results were below our estimates, accounting to only 64.0% of our previous full-year net profit forecast of RM175.5 mln, although revenue was broadly in-line, making up about 71.5% of our sales target of RM4.30 bln. The variance was mainly attributed to weaker-than-expected EBITDA margins and an unexpected loss reported by its Indonesian unit following lower orders.

Prospects

We believe the group is not out of the woods just yet as VSI’s offshore subsidiaries remain mired by rising costs, declining turnover and low utilisation rates. VSI’s Chinaunit, V.S. International Group reported significantly weaker earnings (3QFY18: -72.9% Y.o.Y), which was exacerbated by a net loss incurred by its Indonesian segment due to underutilisation of its production facilities. Thus, we expect full-year results to be slightly lower in FY18, compared to the FY17.

Meanwhile, the group has also secured new box built orders from a key client, which is an extension of an existing model currently being produced by the group. Production is scheduled to run at year’s-end. A potential re-rating catalyst is on the horizon if the group manages to secure additional orders for the new product.

Moving forward, we believe that investors should look beyond FY18, which has been hampered by order cutbacks (for older models) and higher-than-expected raw material costs, for positive growth prospects in FY19, which will be driven by the higher turnover from new product models that are set replace their predecessors, more efficient utilisation and improved margins due to ongoing process streamlining.

Valuation and Recommendation

As the reported earnings were below our estimates, we reduce our FY18 net profit and revenue to RM152.2 mln (-13.3%) and RM4.09 bln (-5.0%) respectively after factoring in lower sales target across all segments, in addition to softer bottomline margins amid rising input costs. We also trimmed our FY19 revenue forecast marginally to RM4.84 bln (-1.4%), while net profit was adjusted to RM239.3 mln (-8.8%).

Even so, we maintain our BUY recommendation on VSI with a lower target price of RM1.90 (from RM2.60 previously) on the back of weaker earnings growth expectations, as we believe that the company’s shares has been oversold and now offers a good buying opportunity for investors. The target price is arrived by ascribing a lower target PER of 15.0x (from 18.0x) to its revised FY19 diluted EPS of 12.7 sen. We trimmed our target PER in view of the recent weakness in the share price of industry peers. The ascribed target PER, however, remains at a 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 solid earnings track-record.

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 affecting its margins.

Source: Mplus Research - 29 Jun 2018