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This article first appeared in The Edge Financial Daily on September 27, 2018

VS Industry Bhd
(Sept 26, RM1.73)
Downgrade to trading buy with a lower target price (TP) of RM1.64:
The Group reported an improved RM38.4 million (+4.4% year-on-year (y-o-y), +82.6% quarter-on-quarter (q-o-q) net profit for the fourth quarter of 2018 (4QFY18), contributing to a cumulative FY18 net profit of RM150.8 million which came in line at 97% of our and 99% of consensus full-year estimates respectively. Earnings could have been better if not for certain one-off items which knocked off about RM25 million, though partly mitigated by foreign exchange gains. Annual revenue growth was a robust 24.5%, reflective of higher sales orders from key multinational company (MNC) customers, though profitability (-3.6% y-o-y) was marred by higher operating costs and the one-off items. While we continue to remain wary over its grapples with cost-related issues which compel us to conservatively lower the financial year ending 2019 and financial year ending 2020 (FY19/FY20) earnings by an average 9%, we are affirmed of its longer-tem investment merits, underpinned by increased demand from its key customers. Our TP is lowered to RM1.64 (RM1.68 previously) based on 15 times multiple of a rolled-over fully-diluted calendar year 2019 (CY19) earnings per share of 10.9 sen. While looking fairly-valued currently, we are only lowering our call to a “trading buy” in light of positive news flows surrounding the potential securing of new orders. Separately, the group has declared a fourth interim dividend of 0.6 sen for the quarter and is proposing a final dividend of 0.6 sen to bring total dividend for the financial year to 4.7 sen (FY17: 5.9 sen).

Revenue for FY18 was 24.5% higher y-o-y largely on account of a key MNC customer in its Malaysian operations which mitigated a decline in revenue from a key US customer due to earlier-than-expected (though planned) product line cessations. On a positive note, production of new models for this customer has since commenced and will be fully reflected in first quarter for financial year ending 2019 (1QFY19) numbers onward. Indonesia is steadier post-change from consignment to turnkey manufacturing basis for a particular client, though contributions to overall remain small at 7% compared to Malaysia’s 76%. China was the obvious drag on the group; its annual revenue was down 13.7% y-o-y to RM692.9million as lower sales orders were completed for the year.

Net profit for FY18 was 3.6% lower y-o-y to RM150.8 million, notable for three one-off items, 1) RM16.9 milllion loss on disposal of a subsidiary in China, 2) RM6.6 million associate-related loss, which we gather is related to the Vietnamese operations of VSIG and 3) RM3 million impairment loss on properties. These were, however, partly mitigated by an RM16.8 million foreign exchange gain. In addition to the above, profitability was also marred by 1) set-up, testing and higher labour costs in preparation for upcoming production lines, 2) operational efficiencies for certain box-built assembly lines not hitting desired levels as yet, and 3) difficulties in passing on increased costs in China to customers owing to competitive operating environments.

The group continues to stand ready to take on new orders, which we believe are in the works, in the recently acquired manufacturing facility which can house up to 3 box-build assembly lines (not including ancillary lines). Another new warehouse-cum-manufacturing facility having the capability to house seven assembly lines is also nearing completion. — PublicInvest Research, Sept 26

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