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Friday, June 29, 2018

VS Industry Berhad - Disappointing Quarter

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The Group reported a somewhat disappointing 3QFY18 net profit of only RM21.1m for a cumulative 9MFY18 net profit of RM112.3m. This obviously misses our and consensus estimates, only making up 60% and 57% of respective full-year estimates, with the significant discrepancy attributed mainly to higher-than expected costs from 1) cessation of certain product models by a US client, and 2) labor, set-up and testing for new product lines. While we are comforted by the fact that the Group continues to secure new orders, reflected by cumulative 9MFY18 revenue of RM3.1bn (+34% YoY) hitting yet another record-high, we are a little wary of its on-going grapples with cost-related issues. We lower our FY18 to FY20 earnings estimates between 8% and 16% to account largely for higher cost assumptions, while also conservatively lower our revenue assumptions by an average 5%. Our target price is consequently reduced to RM1.68 (RM2.22 previously) as we also reduce our multiple to 15x (18x previously) on fully-diluted FY19 EPS of 11.2sen due to higher risk premiums. Our Outperform call is retained nonetheless, as we continue to believe in its longer-tem investment merits despite current challenges.
  • Revenue for 3QFY18 was lower 21% QoQ largely due to the cessation of certain product models by a US client as mentioned earlier though growing 3% YoY on the back of growing orders from its other key customers, all of this happening in its Malaysian operations. Indonesia continued to make steady contributions post-change from consignment to turnkey manufacturing basis for a particular client. China also recorded lower revenue for the quarter (- 35.9% YoY) due to lower sales orders completed.
  • Net profit of only RM21.1m (-58.3% YoY, -53.5% QoQ) for the quarter was weighed by all sorts of challenges in Malaysia – 1) set-up and testing costs associated with an upcoming production line, 2) higher labour costs, also in preparation for the upcoming production line, 3) cessation in production of certain products, and 4) operational efficiencies for certain box-built assembly lines not hitting desired levels as yet. In Indonesia, production capacity was under-utilized while in China, higher raw materials and labour costs were not fully passed-through to customers owing to competitive operating environments.
  • Outperform reiterated nonetheless, as we continue to believe in its long-term investment merits despite current challenges. Any particularly pronounced share price weakness as a result of these somewhat disappointing results should be taken as an opportunity to accumulate. The Group has declared a 3rd interim dividend of 0.5sen per share to bring cumulative dividend for the year to 3.5sen, though slightly lower than the previous corresponding period’s 3.9sen.
Source: PublicInvest Research - 29 Jun 2018

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