This article first appeared in The Edge Financial Daily on March 30, 2018
VS Industry Bhd
(March 29, RM2.35)
Maintain buy with a lower target price (TP) of RM2.99: VS Industry Bhd (VSI) reported a net profit of RM45.3 million for its second quarter ended Jan 31, 2018 (2QFY18), 27.5% higher year-on-year (y-o-y) mainly due to higher sales orders and a lower effective tax rate. For the first half of its financial year 2018 (1HFY18), the results were below our and consensus estimates, accounting for about 39% of full-year estimates. The group’s share price has weakened recently in reaction to a confluence of perceivably negative developments, one of which we think should be adequately mitigated by flow of work orders from other new product lines.
That said, we are conservatively lowering our FY18 to FY20 estimates by an average 5% to account for changes in product mix, resulting in a slight reduction in the TP to RM2.99, from RM3.11 previously, on an 18 times multiple to FY19 earnings per share of 16.6 sen. We remain excited over VSI’s longer-term prospects, but maintain our trading buy call at this juncture. A second interim dividend of 1.5 sen was declared for the quarter, bringing total dividend declared for the current financial year to three sen per share.
Revenue for 2QFY18 was higher, up 45.8% y-o-y mainly due to higher sales orders from key customers in Malaysia while Indonesia’s revenue was lifted by the change from consignment basis to turnkey manufacturing for an existing customer. Going forward, rising sales orders of new products will sustain growth in FY18 and beyond, underpinned by the growth aspirations of its existing key customers.
Net profit for 2QFY18 increased by 27.5% y-o-y as a result of higher sales orders and lower effective tax rate, which fell from 30.7% in 2QFY17 to 18.8% in the current quarter. Malaysia’s profit before tax remained comparable as operational efficiency for the box-built assembly has yet to achieve the desired level. There were also start-up costs with new assembly lines that came on-stream progressively and these lines would take time to reach optimal production level. The weakening of the US dollar against the ringgit has also affected margins.
It had been recently reported that a key customer will cease the development of an existing product in preference of a more technologically advanced version. While undeniably negative in the mid to longer term, actual production will only be phased out in stages we reckon, depending on product demand. In any case, we believe new orders of other product lines will likely come in to mitigate. We are conservatively lowering our FY18 to FY20 estimates by an average 5% however to account for these changes in product mix.
For China, the group has secured replacement orders from Perfect China for another batch of air purifiers, the quantum about half the previous 400 million yuan contract, we gather. It is also securing new contracts from other customers, which will see contributions from the country flat to mildly positive vis-à-vis FY17. — PublicInvest Research, March 29