Result

• Below expectations. V.S. Industry (VS) registered a net loss of RM19.5m for its 3QFY20 results, as compared to a net profit of RM31.4m in a year ago and RM33.2m in the preceding quarter. Overall, VS posted a net profit of RM61.8m for its 9MFY20, which slumped 43.4% yoy. The results are substantial below our estimate and consensus, meeting 49% and 54% of full year estimates respectively. The surprised loss was mainly due to underestimated severe impact stemming from the halt in production following the movement control order (MCO).

Comment

• Malaysia and Indonesia operations weighed on 3QFY20. VS posted a net loss during this quarter against net earnings in 3QFY19 and 2QFY20 mainly due to MCO imposed by the government from 18 March 2020 coupled with losses incurred in Indonesia. Malaysia segment experienced a drop in revenue (-51.3% yoy, -45.3% qoq) and PBT (-142.4% yoy, -141.6% qoq) as production was halted during this period, whilst fixed operating costs such as, amongst others, depreciation, staff and production workers’ salaries, as well as financing costs continued to incur. Hence, the significant drop in topline was insufficient to cover the fixed overheads and financing costs during this quarter. Furthermore, Indonesia segment recorded a loss for this quarter no thanks to less favourable sales mix and inventories write-off that amounted to RM3.0m. The same applies to the Group’s weaker 9MFY20 performance.

• Narrowing losses in China operation. Amid the lackluster performances posted by its Malaysian and Indonesian operations, VS recorded a smaller loss in China operation as LBT narrowed to RM3.1m in this quarter (vs LBT of RM9.5m a year ago and RM3.5m in the prior quarter) and LBT of RM9.7m during 9MFY20 (vs LBT of RM33.6m in 9MFY19) mainly attributable to lower operating expenses incurred following the streamlining of activities and adoption of an asset-light business model with lower gearing structure.

• Return to profitability in 4QFY20 but short-term outlook remains challenging. With the resumption of operations, VS expects to return to profitability in the coming quarter. Nevertheless, it is without doubt that the situation remains challenging and demanding. With consumer spending across the world affected by the impact of economic loss arising from the Covid-19 pandemic as well as the resultant strict movement control measures, the overall order flow from customers during the current financial year is expected to be lower than the previous year. Also, the discussions with prospective customers continued to be hindered by the restriction on international travels. Meaningful progress may only be achieved as and when the international travel restriction is lifted.
• Slowdown in orders for coming quarters. Management expects its major UK customer to revise down its coming orders amid the coronavirus pandemic. On the other hand, orders from its coffee brewer and pool cleaner customers shall remain intact. For its US customer, management guided earlier that the 2nd and 3rd models will only commence in FY2021 from initial schedule of Mar this year (the 1st model reached optimal production). Overall, the Group expects its FY20F topline and bottom line to be weaker than FY19.
• Overseas operations remain subdued. We envisage its Indonesia and China operations to be under-utilization of production capacities given prevailing challenging operating environments. We expect VS’ Indonesia and China segments to continue bleeding.

Earnings Outlook/Revision

• We slash our net earnings estimates for FY20F and FY21F by respective 26.8% and 16.1% to RM91.5m and RM119.7m after lowering our sales assumptions and margins for its Malaysian and Indonesian segments.

Valuation & Recommendation

• Maintain HOLD with a higher target price of RM0.92 (from RM0.79) after ascribing a higher PE multiple of 14x (from 10x) amid earnings cut. Our revised target price is now pegged at 14x FY21F EPS in view of the intensified US China trade war which could benefit the local electronic manufacturing services (EMS) providers.

Source: JF Apex Securities Research - 24 Jun 2020