Result

• Within expectations. V.S. Industry (VS) registered net earnings of RM33.2m for its 2QFY20 results, which tumbled 12.4% yoy and 31.0% qoq. For 1HFY20, VS posted a net profit of RM81.3m, up 4.6% yoy. The first half year results are in line with our expectation and consensus, meeting 46- 47% of full year estimates.

Comment

• Malaysian operation weighed on 2QFY20. The Group recorded lower yoy and qoq bottom line on the back of weaker top line (-16.2% yoy and 20.7% qoq). The poor performances of its Malaysian and Indonesian operations bogged down its overall group’s earnings during the quarter. For Malaysian segment, VS experienced lower sales orders from its key customers (segmental revenue: -19.4% yoy and -25.0% qoq; segmental PBT: -8.3% yoy and -26.7% qoq). Meanwhile, for its Indonesian segment, the Group slumped into the red no thanks to less favourable forex coupled with under utilisation of production capacity (posting segmental Loss Before Tax (LBT) of RM1.5m in 2QFY20 against PBT of RM0.3m in a year ago and RM1.1m in the immediate preceding quarter).

• Narrowing losses in China operation lifting 1HFY20. Amid the lackluster performance posted by its Malaysian operation (segmental PBT: -4.7% yoy), VS still recorded a higher 1H result driven by smaller losses in China operation as LBT narrowed to RM6.6m in 1HFY20 against LBT of RM24.1m in 1HFY19. This was mainly due to lower operating expenses incurred following the Group’s streamlining activities and adopting an asset-light model with lower gearing structure.
   
• Challenging 2HFY20. VS would face an uphill task in 2H results no thanks to the pandemic which resulted in: 1) supply chain disruption; 2) lower sales orders pursuant to weak consumer demand on VS’ major customers’ products; and 3) lower utilization rate and even production disruption arising from the movement control order (MCO).
   
• A double whammy of supply and demand sides. The Group highlighted that the supply chain experienced some delays in materials shipment as suppliers in China are now catching up on production since resuming operations in middle February 2020. Meanwhile, on the demand side, outlook for the next few months appears uncertain at this juncture. Given the extent and reach of COVID-19, the Group anticipates order flow from customers may slow down in the coming quarters, which in turn, would affect the financial performance for 2HFY20. Discussion with prospective customers have also been held up in view of the travel caution and restriction. In addition, the MCO implemented by the Government that is in place from 18 March 2020 to 1 April 2020 (subsequently extended to 14 April 2020) is also expected to have further impact on the operations of the Group. In a nutshell, the Group expects its FY20F performance to be weaker than FY19.

Earnings Outlook/Revision

• We slash our net earnings estimates for FY20F and FY21F by respective 27.5% and 29.6% to RM125.0m and RM142.6m after lowering our sales assumptions and margins, especially for its Malaysian segment.

Valuation & Recommendation

• We downgrade our call on VS from BUY to HOLD with a lower target price of RM0.79 (from RM1.56) following our earnings cut. Our revised target price is now pegged at lower PE multiple of 10x FY21F EPS (from 14x) in view of the abovementioned headwinds faced by the Electronic Manufacturing Services (EMS) and prevailing risk-off market sentiment.

Source: JF Apex Securities Research - 27 Mar 2020