• 1QFY17 results within expectations

• Cost escalated due to start up and labour expenses

• Brighter 2HFY17 as production shifts to high gear

• China unit expected to be profitable in FY17

• Non rated with FV of RM1.42 pegged at 11x FY17F EPS

1QFY17 results within expectations as earnings made up 22% of our full year expectations while revenue makes up 25% of our full year forecast. V.S. Industry’s (VSI) profit for the quarter came in at RM33.5m, which is 44% lower yoy but 206% higher qoq. To put things into perspective, its net profit margin for the quarter has been compressed to 4.9% from 9.8% a year ago due to higher start-up cost and a RM0.4m loss in foreign exchange as compared to a gain of RM14.6m in the preceding corresponding period.

Cost escalated due to start up and labour expenses. The higher costs incurred during this quarter is attributed to the preparation for more box build jobs from its UK-based Customer D in the coming quarters. The company hired 1000 foreign workers for this reason. As a result, it incurred expenses on new hires, agency fees, foreign employee levies and training costs. We expect cost as a percentage of sales to normalise once this new batch of workers are deployed as production ramps up.

Brighter 2HFY17 as production shifts to high gear. The new lines are expected to be able to make 250,000 units per month at its optimal production level. Currently, only one production line for the box build job is running. Management guided that production of this contract will ramp up in 2HFY17. We expect VSI’s net profit margin to improve in tandem with the production efficiency, utilisation rate and scale. That said, we are keeping our estimates until operations for the box build contract stabilise.

Non rated with FV of RM1.42 pegged at 11x FY17F EPS. We maintain our FY17F EPS forecast of 12.93 sen. Earnings in the second half is likely to come in much stronger as the efficiency for the new box build contract improves. That provides upside potential to our estimates. However, we are keeping our current forecast until its costs normalise.

Source: MIDF Research - 27 Dec 2016