Result

• Earnings deemed within expectations. V.S. Industry (VS) recorded a net profit of RM37.9m for its 2QFY19 results, which declined 14.3% yoy and 4.8% qoq. Likewise, for 1HFY19, VS posted net earnings of RM77.7m, down 10.8% yoy. We deem the 1HFY19 results in line with our expectation/consensus, accounting for 57%/59% of full year estimates as the Group had guided earlier for weaker 2HFY19 pursuant to declining orders from one of its major clients under local operation.

Comment

• China and Indonesian operations weighed on YoY results. For 2QFY19, the Group achieved lower yoy results mainly due to weaker performance posted by its overseas operations – Indonesia (Revenue: -31.5%, PBT: -78.6% as a result of decline in sales orders, lower economies of scale coupled with weaker Rupiah) and China (Revenue: -59.2%, Loss before tax of RM3.7m from PBT of RM20.3m a year ago as lower sales resulted in under-utilisation of production). Similarly, VS posted a lackluster 1HFY19 result on the back of lower top line and bottom line as overall group’s performance was dented by the overseas operations as mentioned above amid better Malaysian operation.

• QoQ performance dragged by Malaysian operation. On qoq basis, the Group achieved lower net earnings no thanks to lower sales and margin from its Malaysian operation (Revenue: -7.3%, PBT: -21.5%) amid better Indonesia operation (PBT: RM0.3m vs 1QFY19 LBT: RM1.3m) and China (Loss narrowed to RM3.7m from previous quarter of RM20.4m) coupled with lower minority interest pursuant to narrowing losses in China operation.

• Outlook remains cautious for China operation. Management highlighted that the outlook for China operation continues to be highly challenging given the uncertainties that include the US-China trade war, rising operating cost structure and intense competition. The issue of under-utilisation of capacity is expected to prevail at this juncture. As counter-measures, the Group continues to be streamlining operations to improve its positioning and operational flexibility.
• Proposed second interim dividend of 1.0sen/share. VS has proposed a 2nd interim dividend of 1.0 sen/share for this quarter. Thus far, the Group has declared a total dividend of 2.0 sen/share (vs 3.0 sen/share for 1HFY18).
• Reducing risk of customer concentration by diversifying customer base. To recap, VS has signed a 3- year Master Supply Agreement with Bissell to manufacture homecare products on box-build assembly basis. The Group has a ready capacity to cater for Bissell’s orders with its new additional factories. The dedicated plant, 160k sf, will be equipped with injection moulding facilities, assembly lines, warehouse and test lab. Sales from Bissell are expected to reach RM1.2bil in CY2022 (CY2019: RM150m, CY2020: RM700m, CY2021: RM1.0b). Its first model of a carpet cleaner/vaccum cleaner is anticipated to commence mass production in August 2019, targeting the North American market. The Group envisages better margins for producing Bissell’s products compared with similar type of products for its existing major customer, given VS has much flexibility of procuring raw material (against having fixed material costs) which could lead to cost savings.

Earnings Outlook/Revision

• No change to our net earnings estimates for FY19- 20F. We anticipate softer 2HFY19 results to meet our full year net profit forecasts.

Valuation & Recommendation

• Maintain BUY on VS with an unchanged target price of RM1.27. Our fair value is based on PE multiple of 15.0x FY20F EPS.

• Still has legs. Although share price has appreciated c.40% year-to-date, we believe the stock still render some upside as VS could potentially win more orders and secure new customers in CY2019. The Group is confident that it would benefit greatly from the prevailing US-China trade war as more MNCs are shifting their productions and manufacturing facilities to ASEAN and banking on its ready capacity to accommodate new orders.

Source: JF Apex Securities Research - 27 Mar 2019