Results Highlights

• V.S. Industry Bhd’s (VSI) posted a 14.2% Y.o.Y decline in its 2QFY19 net profit to RM37.9 mln, from RM44.2 mln a year ago, mainly due to losses contributed by VSIG which capped higher contribution from local sales. Revenue also fell 12.3% Y.o.Y to RM982.6 mln, from RM1.12 bln last year. VSI has also declared its second interim dividend of 1.0 sen per share, payable on 30th April 2019.

• Cumulative 1HFY19 net profit also narrowed to RM77.8 mln (-10.7% Y.o.Y), from RM87.1 mln previously, owing to: i) net losses across its Chinese and Indonesian subsidiaries, ii) slightly higher tax charges, and iii) net forex loss of RM2.1 mln (vs net gain of RM10.4 mln in 1HFY18). Revenue also weakened to RM2.06 bln, from RM2.19 bln in the earlier corresponding period.

• Annualised, the reported results were more than our previous forecast net profit (RM135.9 mln) and revenue (RM3.88 bln), accounting to 57.2% and 53.1% of our forecast respectively. This was expected as we foresee a weaker 2HFY19 performance, following lower contract orders from a key customer and ongoing restructuring costs, albeit increased orders for a selected household product is expected to soften the blow.

• Still, we reiterate our BUY recommendation for VSI with an unchanged target price of RM1.20 by ascribing to an unchanged target PER of 16.0x to its FY19 EPS of 7.5 sen as we think that its long-term recovery is on-track, buoyed by new contract acquisitions and the progressive ramp-up in production from late 2HFY19 onwards.

Prospects

Going forward, we foresee a softer 2HFY19 due to lower product orders from a key customer, although the worst is expected to be partially cushioned by increased orders for a certain beauty product. Meanwhile, China’s performance is expected to remain sluggish due to underutilisation and inflated business costs amid ongoing streamlining activities.

We also expect to see new customer acquisitions as the group is in discussion with several MNCs, one of which has materialised recently (i.e.: Bissell). VSI has opined that the increasing political and trade tensions have opened up new business opportunities arising from manufacturers looking to shift their manufacturing supply chain to Southeast Asia. Recall that the group is also constructing a new production facility due for completion by mid-2019, signaling near-term optimism for potential new customers.

Further, we also anticipate higher orders from Bissell in due course as it gradually shifts its production to Malaysia. VSI has allocated a CAPEX of about RM5.0 mln which will be mainly used to setup the assembly lines (i.e.: conveyor setup) in the facility allocated to Bissell.

Lastly, long-term partnerships with global household brand owners, proven track record and the ability to manufacture large-sized orders, as well as its coveted status as a onestop EMS provider will remain conducive for the group’s longer-term growth momentum.

Valuation and Recommendation

As the results were as largely expected, we leave our FY19 and FY20 forecast net profit and revenue largely unchanged. Consequently, we reiterate our BUY recommendation on VSI with an unchanged target price of RM1.20 by ascribing to an unchanged target PER of 16.0x to its FY19 EPS of 7.5 sen. We retain our call as we think that its longterm recovery is on-track, buoyed by new contract acquisitions and the progressive ramp-up in production from late 2HFY19 onwards.

The target PER remains at a premium to its closest competitor, SKP Resources Bhd, after taking account the group’s leading position in Malaysia’s EMS industry that is strengthened by 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 - 27 Mar 2019