KUALA LUMPUR (June 24): After posting a net loss of RM19.53 million for its third financial quarter ended April 30, 2020 (3QFY20), analysts are expecting VS Industry Bhd's (VSI) 4QFY20 to be profitable, but flagged that there are still challenges that it has to contend with the Covid-19 fallout.

In a note to clients today, JF Apex Securities Research analyst Lee Chung Cheng said while VSI is expected to post a profit in the forthcoming quarter, its FY20 and FY21 are slated to be challenging given the strict movement control measures, and anticipated slower order flow from clients.

Its major UK customer is expected to lower its future orders amid Covid-19. However, orders from coffee brewer and pool cleaner customers should remain intact.

"For its US customer, management guided earlier that the second and third models will only commence in FY21 from initial schedule of March this year (the first model reached optimal production). Overall, the group expects its FY20 top line and bottom line to be weaker than FY19," Lee said, noting that it expects its Indonesia and China operations to continue bleeding.

CGS-CIMB Research analyst Syazwan Aiman Sobri has cut VSI's earnings per share (EPS) for FY20 through to FY22 by 2.2% to 17.2%, as VSI's nine months ended April 30, 2020 (9MFY20) earnings came in below expectations.

"(This is) to factor in lower operating margins and a more conservative outlook on sales due to an uncertain demand outlook. Note that our current forecasts do not factor in any potential new clients which VSI could secure once travel restrictions are lifted," he said in a note.

On its 4QFY20 results, Syazwan said CGS-CIMB Research expects VSI to be profitable as it will make up for order backlogs following the resumption of production at its Malaysian operations since late April. This will be primarily driven by stronger orders from its US-based customer, which was secured in 2019.

Meanwhile, PublicInvest Research analyst Ching Weng Jin said VSI's 9MFY20 net profit of RM61.7 million was below house and consensus estimates at 49% and 55% of full-year numbers, respectively.

Ching is cutting VSI's FY20 estimates by 35.1% to account for the six-week shutdown in Malaysia, while also imputing higher operational costs. FY21 and FY22 net profit estimates have also been trimmed by an average of 6% as the research house has lowered forward growth assumptions.

Elsewhere, RHB Research analyst Soong Wei Siang said post the 3QFY20 results, the research house is cutting its earnings forecasts on VSI's FY20 to FY22 by 27%, 9% and 9% respectively.

However, he believes that the group will post a 4QFY20 net profit as orders from major customers have remained largely unchanged compared with before the MCO.

"We believe VSI will return to the black in 4QFY20. Meanwhile, the process of securing new customers was affected by border closures, and management expects meaningful progress to be achieved only after the travel restrictions are lifted. We highlight that management has remained committed to the policy of paying out at least 40% of net profit as dividends, and note that VSI is now in a net cash position (RM147 million as at 3QFY20)," Soong stated in a note.

VSI posted its first quarterly loss since the quarter ended Sept 30, 2011. The RM19.53 million loss, from a net profit of RM31.38 million in 3QFY19, was mainly driven by the poorer performances from its China and Malaysia operations. Quarterly revenue was down by 43% year-on-year to RM505.65 million, from RM888.26 million.

9MFY20 net profit fell by 37.4% to RM61.74 million, from RM109.13 million, with revenue for the nine months dropping by 19.7% to RM2.36 billion, from RM2.94 billion.

According to Bloomberg, VSI has four "buy" calls, five "hold" calls and two "sell" calls. The counter has a consensus 12-month target price (TP) of RM1.05. In terms of the range of TPs prescribed by the 11 research houses that cover the stock, AllianceDBS Research's TP is at the top end of the range at RM1.40 apiece, while AmInvestment Bank is the lowest at 80 sen.

As of 11.25am, shares in VS Industry were up by three sen or 3% at RM1.03 apiece, valuing it at some RM1.92 billion. It saw 31.78 million shares transacted. On a year-to-date basis, it is down by 23.13%.