This article first appeared in The Edge Financial Daily on December 16, 2019

VS Industry Bhd
(Dec 13, RM1.34)
Maintain buy with an unchanged target price (TP) of RM1.60: VS Industry results were within our expectations despite reporting a lower revenue (-4% year-on-year [y-o-y]) and core net profit (-3% y-o-y) in the first quarter of financial year 2020 (1QFY20). Notably, its China operations narrowed losses in 1QFY20 following a restructuring and streamlining exercise. The group has also commenced mass production of its first model for Bissell in September and targets to commence mass production of the second model by early 2020.

Revenue declined 4% y-o-y, mainly due to a lower contribution from its China operations (-34% y-o-y), which have been impacted by weak consumer and business sentiments arising from the US-China trade tensions. Revenue from its Malaysia operations was flat y-o-y as the reduction in orders for floor-care products from its key customer was compensated by a strong pickup in orders for personal care product.

Net profit grew 21% y-o-y to lower losses from its China operations, following a restructuring and streamlining exercise of its operations through the adoption of an asset-light and lower-cost model. The 1QFY19 results were also dragged down by a loss on disposal of RM5.4 million on a subsidiary in China. Stripping off the one-off items, the group’s core net profit declined 3% y-o-y due to a lower contribution from its key customer in Malaysia. Notably, its China operations’ pre-tax loss narrowed significantly by 85% to RM3 million, as the group managed to bring down its operating expenses following the streamlining exercise. Meanwhile, its Indonesian operations have turned around and recorded a RM1 million pre-tax profit in 1QFY20, compared to a RM1 million pre-tax loss in 1QFY19, driven by better product mix.

We maintain our earnings forecasts and reiterate our “buy” call and an unchanged TP of RM1.60 based on a target price-to-earnings ratio of 16 times. We like VS Industry for its: i) diversified customer mix; ii) strong ability in securing new contracts, which makes it a prime beneficiary of trade diversion; and iii) earnings growth on the back of new orders and lower losses from its China operations. Downside risks include key customer risk; reliance on foreign labour; a prolonged US-China trade standoff; and global economic slowdown. — Affin Hwang Capital, Dec 13