Maybank Research expects VSI to gain operational efficiency especially for the Malaysian operations in the coming quarters.
KUALA LUMPUR: Electronics manufacturing services (EMS) players in Malaysia such as Denko, SKP Resources and VS Industry are on an expansion drive as well to meet the future demand of existing or new customers, says UOB Kay Hian Malaysia Research.
The research house said on Tuesday although it is positive on these developments in the EMS space, the recent sell-down in the small- and mid-cap space may be a paradigm shift for rates amid market volatility bringing valuations closer to historical mean.
UOB Kay Hian Research said manufacturers which are vertically integrated stand a better chance of securing more orders from customers, since they have more control over cost and quality in the entire production process, which reduces the risks of cost hikes, disruption to raw material supply and quality issues.
It cited that VS Industry expects its two plants with a total of 20 assembly lines to come on-stream by mid-18. These are to meet the demand of its existing or new customers over the next three to five years.
As for SKP, its plant, which was completed in 2H15, has three assembly lines and the capacity to accommodate 15 more assembly lines.
As for Denko, the research house said it had bought two parcels of land with buildings last year for RM65mil to RM75mil, which resulted in a 49% increase in total production capacity to meet future demand of its key customer.
UOB Kay Hian Research pointed out that recent popular home appliances with cutting-edge technology include the robot vacuum, air purifier, smart refrigerator, two-in-one combo laundry system, multi-function hair dryer etc.
Such technological innovations will benefit local EMS players given their established track records with major brands, their in-house R&D, as well as capability in managing costs due to their large scale of operations.
It also noted that the EMS sector, which is part of the small-, mid-cap space had enjoyed a valuation rerating in 2H17 with valuations breaking new highs.
Hence, the recent sell-down in the small-, mid-cap space (inclusive of listed EMS players) in the past two months may be attributed to a paradigm shift for rates amid market volatility, bringing
price-to-earnings (PE) valuations closer to historical mean.
“We note that the more severe sell-down of 38% on SKP and 32% on VSI from their year-to-date highs as compared with Denko’s -18% could be due to their high institutional shareholding of more than 50%. To be conservative, we have revised downwards our pegged PE of the listed EMS players under our coverage,” it said.
SKP
The research house said SKP would start manufacturing PCB in August 2018.
It had previously expected SKP to record a 22.7% on-year earnings growth driven by: a) higher orders from increasing demand from its key customer, and b) margin improvement on higher efficiency and commencement of in-house assembly of PCB.
However, we assume it will take a longer-than-expected time for new assembly lines to be awarded in the near term given SKP’s current focus on the manufacture of PCB.
“Hence, we cut our FY19-20 earnings by 6% each to RM150mil/RM171mil respectively. Potential catalyst to its share price will be the securing of large contracts from key customer given the capacity availability.
“We take the opportunity to revise downwards our target price to RM1.60 (from RM1.85), following our latest earnings revision and based on a lower 12x PE (from 13x) pegged to its 2019 EPS. Entry price: RM1.50,” it said.
VS Industry
As for VS Industry, it said moving towards FY19, it expects the company to chart a 55% on-year earnings growth driven by: a) arrival of new models for a key customer from May 2018 onwards which command better margins, b) commencement of more assembly lines of new product/variants of existing product for a key customer, and c) margin
improvement on full ramp-up of the assembly lines.
“Although we believe VSI is working hard to secure more contracts from existing or new customers to fill up the new
capacities of up to 20 assembly lines coming on stream in mid-2018, we note that nothing is firm yet at this juncture. VSI targets to fill up the new capacities over the next three to five years.
UOB Kay Hian Research took the opportunity to revise downwards its target price to RM2.90 (from RM3.10), based on a lower 13x PE (from 14x) pegged to its 2019 EPS. Other than the key updates mentioned above, we note that its operations are running as per usual. Key catalyst will be more contract wins to fill up its u
As for Denko, its operations were similar to VSI and SKP who are principally involved in box-built assembly, the recent acquisition of IMS Group by Denko in 1Q18 will enable Denko to tap into the ambitious expansion drive of IMS Group’s key customer, which accounts for >90% of total sales.
IMS Group is also the largest supplier of filters for its key customer, accounting for 80-85% of the customer’s requirement. The recent acquisition of two plants by Denko last year, which raises its capacity by 49%, reflects growing demand from its key customer.
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