Result

• Earnings below expectations. V.S. Industry (VS) posted a net profit of RM39.8m for its 1QFY19 results, which decreased 7.2% yoy. The results are below our expectation and consensus, accounting for 19% of full year estimates. The lower-than-expected results were mainly due to widening loss in its China operation which dragged down its overall performance.

Comment

• Weaker yoy performance dragged down by China and Indonesian operations. The Group achieved lower yoy results mainly due to loss on disposal of a subsidiary in China coupled with forex loss as a result of strengthening of MYR against USD (higher raw material costs incurred). Also, its Indonesian operation incurred net loss during this quarter no thanks to a decline in revenue and weakening of Rupiah.

• Challenging outlook for its China operation. China operation recorded lower revenue during the quarter as a result of lower sales orders, rising operating costs and further aggravated by retrenchment costs incurred. Moving forward, we envisage that the Group’s China operation will continue its losses in coming quarters due to on-going streamlining exercises and further affected by prevailing US China trade war.

• Slowdown in orders from a key customer in 2HFY19F. The Group expects lower orders from one of its major customers in its Malaysia operation, possibly seeing its orders reduced by RM500m for FY19F. On the other hand, the Group is actively seeking other MNC customers for new orders to fill up its excess capacity. With higher minimum wages starting next year, we expect VS to continue facing issue of elevated labour costs for its domestic operation, currently with 8k workers, amid lower orders and utilisation rates. The Group’s margin could be under pressure as it fails to attain optimal capacity and operational efficiency.

• Proposed first interim dividend of 1.0sen/share. VS has proposed a 1st interim dividend of 1.0 sen/share for this quarter, which is lower than 1.5sen/share declared in 1QFY18.

Earnings Outlook/Revision

• We slash our net profit forecast for FY19 and FY20F by respective 14.8% and 13.8% to RM175.6m and RM205.3m after lowering our sales orders, particularly in domestic operation and applying lower margins pursuant to losses in China and Indonesian operations.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM1.31 (RM1.69 previously) following our earnings downgrade. Our valuation for the stock is now pegged at PE multiple of 13.5x of FY19 EPS. Whilst the Group’s long-term fundamental remains intact, we reckon that current headwinds could dent investors’ interests in the stock amid tepid market sentiment on small-and-mid cap stocks.

Source: JF Apex Securities Research - 17 Dec 2018