Despite recording higher revenue (+3% yoy), YSP Southeast Asia (YSP)’s core net profit slipped by 39% yoy in 2Q19, mainly due to the start-up expenses for its new equipment and the weakening of the RM against the US$. The weak performance was in line with our expectations. With most of the equipment in production and running at more efficient rates, we expect the margin to improve gradually going forward. YSP declared a higher DPS of 8.5sen for 2Q19 (2Q18: 7.0sen). We maintain our earnings forecasts and reiterate our BUY call on YSP with an unchanged target price (TP) of RM3.00.

2Q19 Continued to be Soft

YSP reported a higher revenue of RM70m (+3% yoy) in 2Q19 on the back of stronger overseas sales (+24% yoy), which offset the soft domestic sales (-5% yoy). Core net profit, however, declined by 39% yoy to RM5m in 2Q19, mainly due to: i) the start-up expenses for its new equipment as the group has invested in new equipment to enhance productivity and efficiency, and ii) the weakening of RM against the US$ as most of its raw materials are purchased in US$. Cumulative 6M19 core net profit came in within our expectation but below market expectations, making up 48% and 43% of our and consensus full-year earnings estimates respectively.

Expecting a Gradual Recovery in the Coming Quarters

On a positive note, with most of the equipment in production and running at more efficient rates, we expect the margin to improve gradually in the coming quarters. Moreover, with regards to forex risk, our in-house forecast expects the Ringgit to strengthen gradually towards RM4.10 against the US$ by end-2019 (RM4.22/US$ currently), hence we see minimal risk for the RM to weaken further from current levels.

Maintain BUY With An Unchanged TP of RM3.00

We make no changes to our earnings forecasts and maintain our BUY rating on YSP with an unchanged TP of RM3.00, based on unchanged target PER of 14x. We continue to like YSP for its defensive business. Slipping to its 2-year low of RM2.30, shares currently trade at 2020E PER of 10.7x or ex-cash 2020E PER of 9.2x. We believe the undemanding valuation and reasonable dividend yields (3-4% per annum) offer minimal risk for investors to ride on its earnings improvement. Downside risks: weakening of RM against the US$, product recalls and regulatory risks.

Source: Affin Hwang Research - 30 Aug 2019