VS Industry Bhd
(June 29, RM1.55)
Maintain outperform with a lower target price (TP) of RM1.68: VS Industry Bhd reported a somewhat disappointing net profit for the third quarter of the financial year ended April 30, 2018 (3QFY18) of only RM21.1 million for a cumulative first-nine-month FY18 (9MFY18) net profit of RM112.3 million. This obviously missed 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: i) the cessation of certain product models by a US client; and ii) labour, set-up and testing of new product lines. The group continued to secure new orders, reflected by its 9MFY18 revenue of RM3.1 billion (+34% year-on-year [y-o-y]). A little wary of its ongoing grapples with cost-related issues, we lower our FY18 to FY20 earnings estimates by between 8% and 16% to account largely for higher cost assumptions, while also conservatively lower our revenue assumptions by an average 5%. Our “outperform” call is retained nonetheless, as we continue to believe in its long-term investment merits despite current challenges.
Its revenue for 3QFY18 was 21% lower quarter-on-quarter (q-o-q), but it grew 3% y-o-y on the back of growing orders from its other key customers in its Malaysian operation. Indonesia continued to make steady contributions post-change from consignment to a turnkey manufacturing basis for a particular client. Its China operation also recorded a lower revenue for the quarter (-35.9% y-o-y) due to lower sales orders completed.
Its net profit of only RM21.1 million (-58.3% y-o-y; -53.5% q-o-q) for the quarter was weighed by all sorts of challenges in Malaysia: i) the set-up and testing costs associated with an upcoming production line; ii) higher labour costs; iii) cessation of production of certain products; and iv) operational efficiencies of certain box-built assembly lines not hitting desired levels as yet. In Indonesia, production capacity was underutilised, while in China, higher raw materials and labour costs were not fully passed through to customers owing to competitive operating environments.
Any particularly pronounced share price weakness as a result of the somewhat disappointing results should be taken as an opportunity to accumulate. The group has declared a third interim dividend of 0.5 sen per share to bring its cumulative dividend for the year to 3.5 sen, though slightly lower than the previous corresponding period’s 3.9 sen. — PublicInvest Research, June 29