One of VS Industry
KUALA LUMPUR: VS Industry Bhd
’s core earnings for the fourth quarter ended July 31, 2016 were below expectations mainly due to impairment losses but JF Apex Research expects earnings to improve.
The research house said VS Industry registered 4QFY16 core net profit of RM8.4mil (after excluding forex gain of RM3.3mil), down 75.5% on-year and 64.4% on-quarter.
However, the group’s FY16 results were still higher, up 5.4% on-year, with core net earnings of RM110.1mil (excluding forex gain of RM10.4mil in FY16).
“The results were below our and consensus expectations, accounting for 90% of our FY16 forecasts and 87% of market estimates. The underperformance was mainly due to impairment losses incurred in 4QFY16,” it said.
The factors were larger-than-expected provisions of RM21.8mil (net impact of RM17.2mil against earlier guidance of RM9.8mil after adjusting for minority interest) for deposits paid for the proposed acquisition of 20% stake in a solar plant in Inner Mongolia. There was also a RM7.6mil impairment for its 12.1% investment in London-listed Seeing Machines Limited which was marked-to-market.
JF Apex Research said the 4QFY16 results were deemed healthy operationally. Operational wise, excluding the impairments totaling RM29.4mil and forex gain of RM3.3mil in this quarter, the group recorded RM35.0mil adjusted profit before tax (PBT).
Similarly, the group achieved adjusted PBT of RM160.9mil for FY16, up 28.6% on-year as compared to RM125.1mil in FY15 underpinned by 12.3% growth in topline.
The increase in revenue was due to strong contributions from Dyson and Zodiac amid slight decline from Keurig (due to component issue supplied by third party in China), and improved sales orders from China and Indonesia.
“Looking ahead, the group’s FY17 earnings will be mainly supported by PCBA, battery pack and box-built assembly of vacuum cleaner for Dyson, as well as assembly works for existing model and original design manufacturers (ODM) for the new model of coffee brewer for Keurig.
“Indonesian operations returned to the black in FY16 with PBT of RM7.1mil, against pre-tax loss of RM3.6mil a year ago thanks to higher orders secured from existing customers and higher margin benefited from economies of scale following an increase in production.
“The group expects its performance to continue improving in FY17 with box-built assembly for a key customer there. Meanwhile, for China operations, it registered adjusted PBT of RM2.9mil (adjusted for abovementioned impairment), successfully turnaround from a pre-tax loss of RM7.6mil in FY15 backed by better sales volume coupled with depreciation and fixed overheads which were largely factored in.
JF Apex Research said the group envisages its overseas operations to remain profitable given new orders from NEP (Diamond water filter) and an ODM air purifier,” it said.
The research house maintained its Buy on VS Industry with an unchanged target price of RM1.75.
Its fair value was based on 13.5 times FY2017F PE (historical peak PE) with diluted EPS forecast of 13 sen.
“We advise investors to accumulate the stock amid current share price weakness in view of its: a) commendable core earnings growth, up 61.3% for FY17F and up 18.6% for FY18F; b) strong order pipeline from Dyson which would potentially enhance its future earnings; c) resilient business model as a leading local Electronics Manufacturing Services (EMS) provider; and d) decent dividend yield over 4% for FY17F,” it said.
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