Result

• Earnings broadly in line with expectations. V.S. Industry (VS) recorded a net profit of RM31.4m for its 3QFY19 results, surging 43.4% yoy but tumbling 17.2% qoq. For 9MFY19, VS posted net earnings of RM109.1m, which was flat yoy. The 9MFY19 results are in line with our expectation/consensus, accounting for 80%/83% of full year estimates as the Group had guided earlier for softer 2HFY19 pursuant to weaker orders for its Malaysian operation.

Comment

• Higher yoy and lower qoq results, as expected. The Group achieved better yoy performance in its 3QFY19 bottom line mainly due to low base effect in the previous corresponding quarter pursuant to high set-up costs associated with commissioning of new lines that were incurred during 3QFY18. Also, increase in productivity with production lines running at more optimal level helped to propel the Group’s yoy results. Besides, VS’ Indonesian division returned to the black (3QFY19 PBT of RM0.4m vs 3QFY18 pre-tax loss of RM1.2m), underpinned by favourable product mix, lifting further the overall Group’s performance. On the other hand, the weaker qoq result (top line: -9.5%; bottom line: -17.2%) was mainly attributable to lower sales orders for its Malaysian operation with segmental revenue and PBT decreasing 9.6% and 9.9% qoq respectively.

• Proposed third interim dividend of 0.8 sen/share. VS has proposed a 3rd interim dividend of 0.8 sen/share for this quarter. Thus far, the Group has declared a total dividend of 2.8 sen/share (vs 3.5 sen/share for 9MFY18).

• Update on Bissell production. VS is in the midst of setting up production facilities with tooling and mould fabrication processes. It targets to commence mass production in the next 3-6 months’ time. The Group will start production for 1 model, with more models in the pipeline.

• Benefiting from trade diversion activities. VS is actively pursuing opportunities arising from the prevailing US-China trade war. We understand that the Group is in advanced stages of discussions with several potential customers. Should new orders come to fruition, it would fill up the new 180k sq. ft.-factory and further diversify VS’ customer base.

• Indonesia operation shall be in the black. The Group’s Indonesia operation is expected to remain profitable in FY19. VS has received numerous business enquiries as potential customers plan to shift their manufacturing base to Indonesia from China. Hence, the Group is confident in attaining higher level of economies of scale on the back of higher utilization rate.

• Outlook for China operation remains challenging. The operating environment in China remains challenging. Business sentiment remains weak due to the US-China trade war. Production capacity under-utilization is expected to prevail at this juncture. Hence, the Group is currently undertaking restructuring efforts in order to pursue an asset-light strategy to lower gearing and improve financial flexibility as well as streamlining and downsizing existing operations to minimise cost structure.

Earnings Outlook/Revision

• No change to our net earnings estimates for FY19- 20F.

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 over 50% year-to-date, we believe the stock still renders some upside as VS could potentially win more orders and secure new customers in 2HCY2019. 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 - 26 Jun 2019