VS Industry (VSI)’s 9HFY13 results fell short of our expectations due to slower sales and weaker margins. Revenue and core earnings dropped 3.7% y-o-y and 52.9% y-o-y respectively on the back of a weaker topline and  thinner  margins  amid  intense  competition  in  the  EMS  sector  and weak  global  economic  conditions.  We  trim  our  FV  to  MYR1.20  and  cut our  earnings  forecasts  following  the  weaker  reported  numbers. Downgrade to NEUTRAL.

- Below estimate. VSI’s YTD revenue for FY13 edged down 3.7% y-o-y from  MYR835.1m  to  MYR804.1m,  mainly  due  to  weaker  sales  at  its Malaysian  ops  (-1.1  y-o-y)  and  Indonesian  ops  (-17%  y-o-y).  Likewise, core  earnings  (excluding  an  exceptional  loss  amounting  to  MYR5.9m from the dilution of interest in its China associate) plunged by 52.9% y-o-y,  no  thanks  to  lower  margins  caused  by  increased  competition  in  the electronic  manufacturing  services  (EMS)  sector.  Its  profit  before  tax 
(PBT)  for  Malaysian  ops  sank  52.2%  y-o-y  while  Indonesia’s  PBT tumbled  53.9%  y-o-y,  both  attributed  to  lower  sales  orders  from  key customers  and  margin  erosion  arising  from  the  implementation  of  the minimum wage.  

- Weaker  margins.  Its  gross  profit  margin  trended  lower  from  12.4%  to 9.1% y-o-y, while the EBIT margin declined from 5.4% to 2.1% y-o-y. We believe  its  margins  will  continue  to  come  under  pressure  due  to  slower orders and high staff costs.

- Downgrade to NEUTRAL. Given the weaker-than-expected results, we are cutting our FY13 and FY14 numbers by 31% and 29% respectively. We  believe  4Q  will  be  better  than  the  current  quarter  in  view  of  an expected pickup in sales. We downgrade the stock to a NEUTRAL, with its FV revised down to MYR1.20, based on 9x FY14 EPS.

Source: RHB