Friday 02 Jun 2023
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This article first appeared in The Edge Financial Daily on July 4, 2019

VS Industry Bhd
(July 3, RM1.19)
Maintain hold with an unchanged fair value (FV) of RM1.16:
We maintain our recommendation on VS Industry Bhd (VSI) with an unchanged FV of RM1.16 per share pegged at a financial year 2020 forecast (FY20F) price-earnings ratio of 14 times. We raise our FY19 earnings forecast by 7% after attending VSI’s third quarter of FY19 (3QFY19) briefing, where the group shed some light on sales order expectations for its key customers, particularly for its Malaysian operations. The fourth quarter is a seasonally stronger quarter for Keurig.

For the cumulative nine months of FY19 (9MFY19), revenue declined 4% year-on-year (y-o-y) on weaker sales in Indonesia and China, although the fall was mitigated by higher Malaysian sales. Meanwhile, profit before tax (PBT) deteriorated by 9% y-o-y amid declining sales due to the absence of a large order and underutilisation of facilities in China. Also, 2QFY19 and 3QFY19 Indonesian PBT was unable to offset the 1QFY19 loss before tax attributed to lower sales and a weaker Indonesian rupiah.

Its Malaysian operations continued to show positive performance. Revenue grew 7% y-o-y where the decline in box-build orders for its key customer’s floor-care products was not as severe as anticipated. Revenue was supported by increased sales of the customer’s beauty product. PBT soared 20% y-o-y compared with a lower base from 9MFY18 which was affected by start-up costs associated with new lines as all of said key customer’s production lines were reported to be running optimally in 9MFY19. The group is on track to mass-produce Bissell’s first model of carpet cleaner. The tooling and moulding fabrication processes have been completed, and VSI is conducting tests and trial runs on its Bissell assembly line. Mass production is targeted for September, with an additional four models in the pipeline for Bissell.

But the outlook for overseas operations is bleak. VSI’s Indonesian segment is expected to remain profitable for FY19, while its China operations are expected to remain challenging, with the group continuously seeking to boost revenue and utilisation rates for operations in both countries. In China, restructuring efforts and downsizing are ongoing amid weak sentiment due to the US-China trade war.

FY20F printed circuit board assembly (PCBA) concerns are partially mitigated. As some of VSI’s PCBA customers head towards self-sufficiency, the group has managed to secure PCBA orders from a new customer, contributing an additional RM200 million revenue for FY20F.

VSI continues to pursue opportunities from the US-China trade war. It is in active discussion with prospective customers after receiving enquiries from companies seeking to move or diversify their manufacturing bases from China to Malaysia and Indonesia. The group has ready production space in its new 180,000 sq ft factory to accommodate new customers.

We reiterate our “hold” recommendation on VSI as we opine that its prospects, on expectations of steady box-build order growth from FY20 for its Malaysian segment and the challenging outlook for its overseas operations, have been largely factored in at its current share price. — AmInvestment Bank, July 3

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