V.S. Industry (VSI) reported a weak set of results. 9MFY20 core net profit fell by 40% yoy to RM63m due to a decline in sales orders from its key customer, exacerbated by the temporary production halt following the unprecedented Covid-19 Movement Control Order (MCO). Overall, the results were within our but below consensus forecasts. At 17x FY21E PER, valuation looks fair. Maintain HOLD and unchanged TP of RM1.05.

3QFY20 Slipped Into Its First LBT, Since 3QFY13

VSI posted a core LBT of RM27m in 3QFY20 (vs 2QFY20 core PBT of RM44m), its first quarterly LBT since 3QFY13, as the lockdowns impacted production and eroded margins. 3QFY20 revenue fell by 38% qoq to RM506m (-43% yoy), dampened by lower contributions from its Malaysia (-45% qoq; affected by the temporary closure of factories following the implementation of the MCO), Indonesia (-8% qoq) and China (-7% qoq) operations respectively. In addition, VSI’s 3QFY20 EBITDA margin was squeezed by 6.7ppts qoq to 0.9% due to the lower revenue and higher operating costs (ie, strict social distancing measures) during the MCO period.

9MFY20 Core Net Profit Dropped by 40%, Within Our Expectations

As a whole, VSI’s 9MFY20 core net profit fell by 40% yoy to RM63m, due to a decline in sales orders from its key customer in 6MFY20, and the negative impact from the Covid-19 MCO in 3QFY20. The results were broadly within our expectations but below consensus, accounting for 79% of our and 56% of consensus’ full-year forecasts.

Recovery in 4QFY20 But Uncertainty Looms Ahead

Moving ahead, VSI expects its 4QFY20 to return to the black as the Group is gradually ramping up production to cope with the existing backlog. Recall that VSI restarted operations during the second week of April 2020 and had adhered to the government’s strict standards of procedure. Although we learnt that near-term orders remain intact, the overall order flow from customers was said to be shorter and could be lower yoy due to the challenging global outlook.

Maintain HOLD

We keep our earnings forecasts unchanged, pending the upcoming results briefing. Maintain HOLD with an unchanged price target of RM1.05, based on an unchanged 16x on CY21E EPS. Key upside risks: i) a vaccine for the contagious Covid-19, and ii) stronger-than-expected demand. Downside risks include: i) dependence on single major customer; ii) reliance on foreign labour, iii) competition risk, iv) a prolonged US-China trade standoff, and v) a slowdown in the economy.

Source: Affin Hwang Research - 24 Jun 2020