Despite recording a weaker 3Q19 core net profit (-9% yoy), YSP Southeast Asia (YSP)’s yoy earnings contraction has narrowed, while earnings was actually stronger on a qoq basis, despite 3Q typically being a seasonally weak quarter. This reaffirms our view that YSP is on the road to recovery as its new equipment are running at more efficient rates. We maintain our earnings forecasts and reiterate our BUY call on YSP with an unchanged target price (TP) of RM3.00.

3Q19 Showing Signs of a Gradual Recovery

YSP reported a flattish revenue of RM74m (+1% yoy) in 3Q19 as the growth in domestic sales (+3% yoy) was offset by soft oversea sales (-4% yoy). While core net profit continued to decline by 9% yoy, we think the results are showing signs of recovery as the yoy earnings contraction has narrowed to only -9% in 3Q19 from an average -36% in the past three consecutive quarters, despite the unfavourable forex rate in 3Q19 (3Q18: RM4.09/US$ vs. 3Q19: RM4.16/US$). We believe this was mainly due to improvement in margin as its new equipment are running at more efficient rates. The results were in line with expectations.

Continue to Expect Further Improvement in the Coming Quarters

Notably, sequentially, YSP’s core net profit has recorded a significant 19% improvement in 3Q19. Based on the historical 3-year average data, 3Q is typically a seasonally weak quarter, making up only 18-19% of its PBT and core net profit. With both the narrowed yoy decline in core net profit and the qoq improvement in 3Q19, we think that YSP is on the road to recovery following the initial start-up expenses for its new equipment which it incurred in the past few quarters. We continue to expect margins to improve gradually in the coming quarters.

Maintain BUY With An Unchanged TP of RM3.00

We maintain our earnings forecasts, BUY rating and TP of RM3.00, based on unchanged target PER of 14x. We continue to like YSP for its defensive business. Currently trading at 2020E PER of 11x or ex-cash 2020E PER of 9x, 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 - 20 Nov 2019