Results Highlights

V.S. Industry Bhd’s (VSI) 3QFY19 net profit jumped 43.1% Y.o.Y to RM31.4 mln, from RM21.9 mln in the same period last year – contributed by improvements in the domestic business, in-tandem with increased floor utilisation, lower operating costs and higher sales. However, the losses from its China’s operations continue to weigh on the group’s net profit due to under-utilisation. Revenue was marginally higher at RM889.7 mln (+0.9% Y.o.Y), compared to RM881.6 mln in 3QFY18.

• Cumulative 9MFY19 net profit was flattish at RM109.1 mln, from RM109.0 mln previously, although revenue fell 4.1% Y.o.Y to RM2.95 bln, from RM3.07 bln a year ago. The stronger sales from the Malaysian segment were offset by higher losses incurred from the export segments, mainly China and Indonesia.

• We leave our forecasts unchanged as the reported results were within our expectations. The 9MFY19 net profit accounted for 80.3% of our full-year forecast, while revenue came in at 76.1% of our FY19 estimates. Meanwhile, we continue to see a weaker final quarter due to weaker export earnings and potential year-end impairments amid global trade uncertainties and a general slowdown in demand.

• The group has also declared a third interim dividend of 0.8 sen per share, payable on 31st July 2019. We noted that the YTD dividend declared stands at 2.8 sen, compared to 3.5 sen a share in the previous corresponding period.

Prospects

Moving forward, we expect to see near-term weakness in the final quarter of FY19, However, we maintain our longer-term positive outlook on VSI, in-tandem with increasing orders from existing customers like Bissell and Keurig, as well as increased productivity. We also look forward to VSI’s customer portfolio expansion as the group progresses into the final stages of discussion with potential clients, following global trade diversions.

As such, we think that the group is almost out of the woods, with the worst already priced-in its valuation after rebounding from its low in 2018 of 64.0 sen. We think that the group will be able to endure the product transition period as newer models gradually replace older products that have reached the tail-end of its product life (or being phased out). For VSI, it was further exacerbated by the reduced orders from a key customer, albeit cushioned by higher orders for other household models. Since then, the group has diversified its clientele base in a bid to reduce its reliance on any single customer, which is positive in our-view. Subsequently, we think that the production relocation from China to other Southeast countries could be a permanent realignment amid rising trade protectionism.

Meanwhile, the new 180,000 sq.ft. factory, which is the additional capacity allocated to serve potential customers in the near-term, is expected to be completed by year end, a slight delay from the originally scheduled timeline (i.e.: end-June 2019), due to delays from the contractor’s side.

Downside risks include slowing global economy, in-tandem with intensifying trade conflicts which will weigh on the demand for consumer household products, especially higher-end consumer products.

Valuation and Recommendation

We maintain our BUY recommendation on VSI with a higher target price of RM1.25 (from RM1.20) as we rolled-forward our valuation to FY20. We retain our call as we remain cautiously optimistic of VSI’s longer-term outlook which will be driven by increased efficiency, better product mix and higher sales orders. Our target price is derived by ascribing to a lower target PER of 14.0x (from 16.0x), due to weaker EMS outlook as global EMS players face a slower demand amid rising trade protectionism, to its FY20 EPS of 8.9 sen.

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 - 26 Jun 2019