V.S. Industry (VS) reported a weaker revenue (-17% yoy) and core net profit (-11% yoy) in 2QFY20, mainly due to a decline in sales orders from its key customer. We expect 2HFY20 to record a steeper decline as we believe the weak consumer sentiment and global economic slowdown are likely to dampen discretionary spending and hence negatively affect the group’s sales order. Adding to the woes is the negative impact from the MCO. In view of the rising uncertainties from Covid-19, we cut our earnings forecasts by 14-22% for FY20-22. We maintain our SELL call on VS with a lower 12-month TP of RM0.50, based on an unchanged CY20E PER of 10x.

Revenue Declined on Lower Sales Orders From Key Customer

VS’ 2QFY20 revenue declined 17% yoy, mainly due to lower contribution from its Malaysia (-20% yoy) and China operations (-33% yoy). The decline in revenue from its Malaysia operations was mainly due to lower sales orders from its key customer given the following: i) a floor-care product has reached the end of its product lifecycle, and ii) lower PCBA orders as most of its peers (also its direct PCBA customers) are ramping up their PCBA capability inhouse with a target of self-sufficiency. Its China operations, on the other hand, continue to be impacted by the weak consumer and business sentiment.

Expecting Weaker Performance Going Forward

2QFY20 core net profit dropped 11% yoy due to the decline in revenue. While losses from its China operations narrowed following a restructuring and streamlining exercise, PBT from the Malaysia operations declined 8% yoy as a result of lower sales orders. While the 6MFY20 core net profit made up 66% of our previous forecast, we still expect weaker earnings in 2HFY20 in view of the deteriorating consumer sentiment, global economic slowdown and negative impact from the MCO. In addition, discussions with prospective customers have been held back due to travel restrictions.

Maintain SELL With a Lower TP of RM0.50

In view of the rising uncertainties, we cut our earnings forecasts by 14-22% for FY20-22. We maintain our SELL call on VS, with a lower TP of RM0.50 based on an unchanged CY20E PER of 10x, which is the sector’s 13-year mean (since 2007). Although VS’s share price has fallen c.50% from its recent peak in January 2020, we think there could be further stock price volatility especially if the Covid-19 pandemic is prolonged. Key upside risks: i) a treatment for the contagious Covid-19, and ii) stronger-than-expected demand.

Source: Affin Hwang Research - 27 Mar 2020