UOB Kay Hian Research sees strong Malaysia orders boosting VS Industry


  • Analyst Reports
  • Thursday, 12 Sep 2019

UOB Kay Hian Malaysia Research: “Given VS’s ability to secure meaningful contracts (new PCBA orders of about RM200mil per year on top of the master agreement with BISSELL), we remain confident of the group securing new contracts from prospective customers."

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects VS Industry's results for the financial year ended July 31,2019 (FY19) to be in line, despite the profit warning from its 43.3%-owned VS International Group (VSIG) in China.

The research house said on Thursday it expected the results to be supported by strong orders from Malaysia judging from 9MFY19 visibility.

“Given VS’s ability to secure meaningful contracts (new PCBA orders of about RM200mil per year on top of the master agreement with BISSELL), we remain confident of the group securing new contracts from prospective customers, ” it said.

UOB Kay Hian Research said further contract wins could lead to a higher target price. It maintained a Buy call on VS Industry with a target price: RM1.55, based on 15 times FY20F PE which is at its three-year mean PE (from 13 times, which is the industry average forward PE).

Recall that VSIG recently released a statement warning of its weak 4QFY19 results. Note that the group is expected to record a net loss of Rmb115m (or -RM68mil based on the latest exchange rate) which worked out to be a RM29m net loss (based on 43.3% stake) to VS Industry in FY19.

This was attributable to: a) the sharp drop in revenue in FY19; and b) provision of impairment amounting to Rmb30m (or RM18mil) of the fixed assets. After excluding the impairment, core net losses from China operations to the group should be RM22mil, which is in line with its assumption.

“All in all, we expect VS’s 4QFY19 (to be released on Sept 26) core net profit to come in at the range of RM27mil to RM30mil, with our core net profit forecast in FY19 being intact, ” it said.

The research house said VS Industry's FY19 group earnings could have been better on-year on the back of a stellar performance from Malaysia operations alone judging from its strong 9MFY19 results, if not for the drawback from the US-China trade war.

The Malaysia operations recorded the best 9M revenue (+7% yoy) and PBT (+20% yoy), thanks to resilient demand for its key customer’s products and better economies of scale on optimal utilisation.

This is on top of the set-up costs incurred for the BISSELL plant. In terms of order visibility as of 9MFY19, additional orders (on box-build and PCBA) for particular products in fact came in higher than management initially expected.

“On Indonesia operations, it is now the net beneficiary of the US-China trade diversion as the order shortfall in 1HFY19 has been progressively filled up by orders diverted from China. Indonesia operations are expected to return to the black by 4QFY19, ” it said.


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