What’s New

• Better-than-expected Malaysian operation. VS guided that its Malaysian operation will perform better than expected during a recent analyst/fund manager briefing as box-build orders from one of its key customers are still resilient. Moving forward, the Group foresees its yearly full assembly orders to reach RM1.5b for FY19F and it is possible to sustain this amount of orders in the near future. Meanwhile, VS’ printed circuit board assembly (PCBA) orders are envisaged at c.RM850m each for FY19F and FY20F (against 9MFY19: RM700m; FY18: RM800-900m). Having said that, management highlighted that competitors are currently equipping themselves with full-fledged facilities to pave the way for more box-build orders from its major customer. Also, some of its customers are producing their own PCBA and incoming orders might be affected.

• Not resting on its laurels in diversifying customer base. As guided earlier, VS strives to secure more prospective clients in order to reduce its customer dependency risk and capitalise on trade diversion opportunity arising from the prevailing US-China trade war. The Group has successfully secured a new customer with order worth RM200m and is about to clinch another order with equivalent or slightly higher value in coming months. These would contribute positively to its FY20F topline onwards.

Comment

• Steady result for upcoming 4QFY19F. Following the better-than-expected Malaysian operation guided by the management, we now envisage the Group to deliver another stable performance for its 4QFY19 result with a reported net profit of RM36.0m (+14.6% qoq but -6.3% yoy) on the back of revenue of RM951.0m (+6.9% qoq; -5.9% yoy). Full year FY19 net earnings are estimated to be flat at RM145.1m, which was slightly down by 1.6% yoy.

• Bissell production is well on track. VS has completed its production facilities for tooling and mould fabrication processes. The Group is currently undergoing the testing and trial runs for the assembly line. It targets to commence mass production for 1 model of its carpet cleaner in September this year, with more models in the pipeline. In a nutshell, the Group expects to rake in RM300-500m revenue in FY20F.

• Improving outlook for Indonesian operation. We expect to see a better showing by its Indonesian operation in 4QFY19F as the Group managed to achieve stronger bottom line in 3QFY19 (+33.3% qoq and returned to the black from a loss a year ago). Management reiterated that its Indonesian operation is expected to remain profitable in FY19F. 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 as a result of higher utilisation rate.
• Tough operating environment under China operation. Management guided that situation in China operation has stabilised and the worst is probably over. Hence, we shall see narrowing losses in the coming 4QFY19F result against 3QFY19 loss before tax of RM9.5m. The operating environment in China remains challenging and business sentiment remains weak due to the US-China trade war. Production capacity under-utilization is expected to prevail at this juncture. Currently, VS is undertaking restructuring efforts, pursuing an asset-light strategy to lower gearing and improve financial flexibility. Besides, the Group is also streamlining and downsizing existing operations to minimise cost structure and losses.

Earnings Outlook/Revision

• We lift our net earnings estimates for FY19F and FY20F by respective 6.2% and 9.4% to RM145.1m (- 1.6% yoy) and RM168.5m (+16.1% yoy) after imputing higher orders following better-than-expected sales from its major customer in Malaysia as well as the abovementioned two new orders. Also, we introduce our FY21F net profit forecast of RM 196.6m (+16.7% yoy).

Valuation & Recommendation

• We reiterate our BUY call on VS with a higher target price of RM1.35 (RM1.27 previously) following our earnings upgrade. Our fair value is now based on PE multiple of 14.5x FY20F EPS.

• Resumption in growth trajectory to propel the stock further. Although share price has appreciated over 60% year-to-date, we believe the stock still renders some upside as VS could potentially win more orders from new customers and its earnings are projected to resume growth trajectory for FY20-21F (~16% yoy). 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 - 12 Jul 2019