Results Highlights

• V.S. Industry Bhd (VSI) posted a marginal increase of 4.4% Y.o.Y in its 4QFY18 net profit to RM38.4 mln, from RM36.8 mln last year, capped by a series of one-off items like: i) loss on disposal of subsidiary, ii) impairment loss on properties, and iii) share of loss attributed to its associates. Revenue also inched higher to RM1.01 bln (+2.8% Y.o.Y), from RM983.4 mln a year ago.

• The group has also declared a fourth interim dividend of 0.6 sen per share, payable on 31st October 2018, together with a final dividend of 0.6 sen per share. Cumulative dividend per share to-date is 4.7 sen, compared to 5.9 sen last year. The payment date of the final dividend will be announced in due course.

• Full-year net profit, meanwhile, fell 3.6% Y.o.Y to RM150.8 mln, from RM156.3 mln in FY17, despite recording stronger turnover of RM4.09 bln, from RM3.28 bln a year ago. The weaker earnings were mainly due to lower margins as a result of higher input costs and initial setup and testing costs in the earlier quarters.

• The group’s normalised earnings (Appendix 1) of RM159.4 mln were within estimates, accounting to 103.5% of our full-year net profit forecast of RM154.0 mln, while revenue was fully accounted for at 100.0% of our forecast.

Prospects

As expected, VSIG’s operations continued to deteriorate resulting in a full-year net loss of RM8.9 mln, compared to a net profit of RM13.5 mln in FY17. We think that the group’s Chinese operations remain uninteresting in the near-term, affected by headwinds like rising business costs and uncertainties resulting from the ongoing trade spat between U.S. and China.

The 4QFY18 group results were also hit by several one-off items related to VSIG, including loss on disposal of subsidiary and impairment on investments, as well as impairment loss attributed to a property located in Malaysia.

Despite the temporary blip in FY18 earnings, we think that VSI’s sales outlook remain positive with increasing contribution from its local manufacturing-arm. Future earnings growth will be driven by higher assembly orders from existing key customers, progressive commencement of new production lines, cost rationalisation initiatives and potentially better ASPs for selected products due to price renegotiations. Meanwhile, capacity growth is also expected to produce better margins in FY19.

Valuation and Recommendation

We adjust our FY19 net profit and revenue forecast to RM224.0 mln (+12.0%) and RM4.92 bln (-1.1%) as we forecast improved contribution from VSI’s Malaysian-unit, albeit slightly capped by extended weakness expected from VSIG, the group’s manufacturing arm in China. We also introduce our FY20 projected net profit and revenue of RM259.9mln and RM5.43 bln respectively.

We maintain our BUY recommendation on VSI with a higher target price of RM2.00 (from RM1.80 previously) as we remain positive on the group’s long-term earnings growth prospects despite rising input costs. The target price is arrived by ascribing an unchanged target PER of 17.0x to its revised FY19 diluted EPS of 11.8 sen. 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 - 26 Sept 2018