Result

• Earnings on track. V.S. Industry (VS) recorded 4QFY17 core net profit of RM34.9m (after excluding forex gain of RM2.5m during the quarter), soaring four folds yoy but tumbling 31.4% qoq. For the full year FY17, the Group posted record core net earnings of RM149.5m (again, excluding forex gain of RM8.9m for the year), up 35.8% yoy, which is in line with our expectation, accounting for 96% of full year estimate.

Comment

• Stronger yoy but weaker qoq, as expected. The strong surge on yoy results were mainly attributable to relatively low base in 4QFY16 as the quarter was mainly affected by impairment losses on Seeing Machines Ltd and deposit in Inner Mongolia. Operational wise, excluding the factor of the above mentioned impairment losses in 4QFY16, the Group still chalked up better yoy core net profit, +15.6%, thanks to higher sales orders. Meanwhile, the weaker qoq results were mainly due to decline in the Group’s gross margin, -3.5ppts, following higher raw material costs as a result of weakening USD against MYR coupled with impairment loss on property during this quarter, mainly in Indonesia despite higher revenue achieved, +15.1% qoq. For the full year, the Group achieved commendable results with higher top line (+50.8% yoy) and bottom line (+35.8% yoy), mainly underpinned by its Malaysian operation and turnaround of its operation in China.

• Proposed 4th interim and final dividends. VS has proposed a 4th interim dividend of 1.0 sen/share as well as a final dividend of 1.0 sen/share for this quarter. Overall, this brings total dividend to 5.9 sen/share for FY17, which is higher than 4.7 sen/share declared in FY16. Moving forward, we anticipate the Group to declare a total dividend of 8.0 sen/share for FY18F or equivalent to a dividend yield of 3.2% based on its dividend policy of 40% payout of net profit.

• Orders in the pipeline. As highlighted by a news report recently, the Group’s operation in China (VS International Group Ltd) is believed in an “advanced stage of negotiation” to secure two new contracts for the manufacture of air purifiers (worth estimated RM160m-215m) and mini refrigerators in China. On top of that, we believe VS could also bag some orders from its existing and new clients for its Malaysia operation judging from its construction of a new factory cum warehouse to boost its existing production capacity.

Earnings Outlook/Revision

• We keep our earnings forecasts for FY18F and FY19F unchanged. We envisage VS to chalk up core net profit of RM233.4m (+56.1% yoy) for FY18F and RM287.3m (+23.1% yoy) for FY19F on the back of higher sales orders in Malaysia and China operations as well as stabilisation of margins with its cost plus pricing model.

Valuation & Recommendation

• Maintain BUY on VS with an unchanged target price of RM2.86. Our fair value is based on 14x FY19F PE (historical peak PE). We like the stock as it is a leading local Electronics Manufacturing Services (EMS) provider and sector bellwether. More importantly, we are confident with the Group’s capability of bagging more orders going forward and sustaining its growth momentum.

Source: JF Apex Securities Research - 28 Sept 2017