Results Highlights

• V.S. Industry Bhd recorded a 20.8% Y.o.Y jump in its 1QFY20 net profit to RM48.1 mln, from RM39.8 mln last year, mainly due to significantly smaller losses from its Chinese business after major downsizing activities in FY19. Revenue, however saw a marginal decline to RM1034.6 mln vs. RM1075.6 mln (-3.8% Y.o.Y) a year ago. Subsequently, the group has declared a first interim dividend of 1.0 sen per share, payable on 6th March, 2020.

• As the latest results were broadly within expectations, with net profit and revenue accounting for 29.0% and 25.3% of our full-year estimates, we keep our forecast unchanged until further information in the next analyst briefing.

• Segment-wise, VSI’s Malaysian business posted slightly weaker performance although it still accounts for the lion share (about 85%) of the group’s total revenue. Meanwhile, Indonesia and China’s revenue also fell to RM70.2 mln (-6.8%) and RM73.5 mln (- 34.5%) respectively. Even so, both segments saw a marked improvement in bottomline, owing to better product mix, increased cost efficiency and the absence of a disposal loss of a subsidiary in 1QFY19.

• We maintain our BUY recommendation on VSI with an unchanged target price of RM1.50 by ascribing to a target PER of 17.0x to its FY20 EPS of 9.0 sen as we remain confident of the group’s consistent earnings track record and strong positioning in the EMS market

Prospects

Moving forward, we think that the group will be capitalising on additional demand from trade diversion arising from the prolonged U.S. - China trade war. Although Washington and China has reached an initial trade deal earlier; successfully holding off additional tariffs on Chinese goods but we think that the damage has already been done as businesses diversifies their supply chains away from China amid rising trade protectionism.

Meanwhile, narrower loss from VSIG, progressive ramp-up in orders for Bissell and resilient demand from other key models will continue to support net profit growth. In addition, we understand that VSI has been in the final stages of discussion with potential customers to take up its ready capacity, which could lead to a further bump up in earnings growth.

On the downside, we remain cautious of increasing competition in the PCBA segment that will weigh on VSI’s existing sales of printed circuit board assemblies (PCBAs), although we think that increasing turnkey customers like Bissell could cushion the negative impact.

Valuation and Recommendation

Subsequently, we maintain our BUY recommendation on VSI with an unchanged target price of RM1.50 by ascribing to a target PER of 17.0x to its FY20 EPS of 9.0 sen as we remain confident of the group’s consistent earnings track record and strong positioning in the EMS market.

The target PER also 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 - 13 Dec 2019