Result

• Earnings above expectations. V.S. Industry (VS) registered a net profit of RM48.4m for its 4QFY19 results, after soaring 15.2% yoy and 54.1% qoq. For FY19, VS posted net earnings of RM157.5m, which was 4.3% higher yoy. The full year results are above our expectation and consensus, exceeding full year estimates by 9-10% mainly due to larger-than-expected positive recognition of minority interest (MI) as the Group incurred higher losses in China operation in this quarter.

Comment

• Better 4QFY19 underpinned by MI. The Group achieved stronger yoy and qoq performances in its 4QFY19 bottom line mainly due to positive contribution of MI pursuant to higher losses in its China operation (operating loss as a result of falling sales orders, lack of economies of scale, and further exacerbated by net loss on disposal of plant and equipment, impairment loss on plant and equipment). On the other hand, the performance of its Indonesian operation during this quarter improved yoy and qoq in both of top line and bottom line thanks to higher sales orders and better product sales mix. For the full year FY19, the commendable performance in its Malaysian operation helped to drive the Group’s overall earnings as segmental revenue and PBT were up 7.6% yoy and 31.0% yoy respectively mainly due to better operational efficiency, favourable product mix and the absence of set-up costs associated with the commissioning of new lines in FY18, amid lackluster performance from its overseas operations.

• Proposed final dividend of 0.8 sen/share. VS has proposed a 4th interim dividend of 0.8 sen/share for this quarter. For FY19, the Group has declared a total dividend of 4.4 sen/share (against 4.1 sen/share for FY18).

• Bissell production is well on track. VS’ first production line for its first Bissell model is the water-based carpet cleaner. The Group has started mass production for Bissell recently and targets for delivery from October onwards. Hence, we expect the contribution to kick in progressively from 2QFY20 onwards with minimal contribution in 1QFY20.

• Malaysian operation is still resilient. We believe that its Malaysian operation is still robust as box-build orders from one of its key customers are still steady. Moving forward, the Group foresees its yearly full assembly orders to reach RM1.5b for FY20F. Meanwhile, VS’ printed circuit board assembly (PCBA) orders are envisaged at c.RM850m for FY20F.

• 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. To recap, 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.

Earnings Outlook/Revision

• No change to our net earnings estimates for FY20F: RM168.5m (+7.0% yoy) and FY21F: RM196.6m (+16.7% yoy).

Valuation & Recommendation

• We reiterate our BUY call on VS with a higher target price of RM1.52 (RM1.35 previously) as we roll over our valuation to FY21F. Our revised target price is pegged at PE multiple of 14x FY21F EPS.

• Resumption in growth trajectory to propel the stock further. Although share price has appreciated over 80% 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. 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 Sept 2019