Results Highlight

• V.S. Industry Bhd’s (VSI) 4QFY19 net profit grew 15.2% Y.o.Y to RM48.4 mln, compared to RM42.0 mln a year ago, lifted by higher domestic sales orders coupled with increased productivity, lower initial setup costs and better product mix. Revenue, however, only gained slightly to RM1.03 bln (+1.9% Y.o.Y), from RM1.01 bln in the same quarter last year. Subsequently, the group has announced a fourth interim dividend of 0.8 sen and a final dividend of 0.8 sen per share, payable on 31st October 2019.
• Full year net profit came in at RM157.5 mln (+4.3% Y.o.Y), from RM151.1 mln in FY18 as weaker contributions from overseas operations shadowed the improved domestic earnings. On that note, revenue from China was almost halved in FY19, while pretax losses almost quadrupled to RM83.0 mln, from RM20.9 mln a year ago – led by prolonged underutilisation and additional costs (i.e.: impairment of fixed assets) arising from its exacerbated downsizing activities.

• The latest results were above expectations as net profit came in about 15.9% more than our forecast of RM135.9 mln, mainly due to significantly higher-than-expected noncontrolling interests. Other than that, interest costs were also lower than initially accounted for. Revenue, however, were in-line with our forecast at RM3.88 bln (or 102.6% our full-year estimates).

Prospects

Orders will be placed cautiously as customers halt aggressive expansion plans amid uncertain macro environment as the showdown between Beijing and Washington show no signs of ending. With that in mind, we expect cost control to remain the key focus for VSI and its China operations are foreseen to remain in the red, albeit losses will be significantly lower after the sizable downsizing activities in FY19.

The loss of orders from a key customer was less significant-than-expected as other players remain unqualified to pick up the orders from VSI. Even so, we still expect to see a decrease in orders from the aforementioned leading customer, which will be offset by sales from other new customers. We remain positive as the group’s focus on securing turnkey customers in-order to fully utilise its one-stop manufacturing capabilities.

Meanwhile, VSI has fired up the mass production for Bissell’s carpet cleaners on 19th September. We expect more models to be introduced in due course as production hit maximum efficiency progressively. Delivery for the first model is slated for October, thus we expect minimal contributions in 1Q2020, albeit we foresee sustained growth momentum in volumes in due time.

VSI received ‘supplier of the year’ 2019 award from Fluidra- Zodiac merger group, due to its track record of having zero defects. Subsequently, we continue to believe that VSI’s position as one of the top EMS player in the region will support its long-standing business relationships, help secure new models and take the group to higher heights.

Valuation and Recommendation

After the unexpectedly positive performance, we upped our FY20 earnings slightly by 2.6% Y.o.Y to RM165.9 mln, while revenue forecasts were more or less maintained. The improved earnings were mainly due to higher margins amid better floor utilisation and increased cost efficiency. We also introduced our FY21 forecast net profit and revenue of RM189.8 mln and RM4.35 bln respectively.

With that, we upgrade our call on VSI to a BUY (from Hold) with a higher target price of RM1.50 (from RM1.25) as we still foresee a positive growth trend in VSI’s earnings, backed by higher orders from a notable household cleaning brand and improved efficiency. Our target price is derived by ascribing to a higher target PER of 17.0x (from 14.0x) to its FY20 EPS of 9.0 sen, the former due to improved sentiment in the EMS industry as local players benefit from trade diversion activities.

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 Sept 2019