PETALING JAYA: VS Industry Bhd’s results for the financial year ended July 31, 2019 (FY19) is expected to be in line despite the profit warning from its 43.3%-owned VS International Group (VSIG) in China.
This would be supported by strong orders from Malaysia judging from its nine-month FY19 (9M19) visibility, according to UOB Kay Hian Malaysia Research.
The research house said that given VS’ ability to secure meaningful contracts, namely new printed circuit board assembly (PCBA) orders of about RM200mil per year on top of the master agreement with US-based Bissell International Trading Co, it remains confident of the group securing new contracts from prospective customers.
Further contract wins could lead to a higher target price, it added.
UOB Kay Hian has maintained a “buy” call on the stock with a target price of RM1.55, This is based on 15 times FY20 forecast price to earnings (PE) which is at its three-year mean PE (from 13 times, which is the industry average forward PE).
There is a prevailing weakness from VS’ China operations, which recently released a statement pre-warning of its weak 4Q19 results.
“Note that the group is expected to record a net loss of 115 million yuan (RM68mil) which worked out to a RM29mil net loss (based on 43.3% stake) to VS in FY19.” According to the research house this was attributed to the sharp drop in revenue in FY19 and the provision of impairment amounting to 30 million yuan (RM18mil) of the fixed assets. After excluding the impairment, core net losses from its China operations should be RM22mil, which is in line with its assumption.
“We expect VS’ 4Q19 (slated to be released on Sept 26) core net profit to come in at the range of RM27mil-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 9M19 results, if not for the drawback from the US-China trade war.
The Malaysia operations recorded the best 9M revenue (up 7% y-o-y) and profit before tax (up 20% y-o-y), thanks to resilient demand 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 9M19, additional orders (on box-build and PCBA) for particular products in fact came in higher than management initially expected.
“On the Indonesian operations, it is now the net beneficiary of the US-China trade diversion as the order shortfall in 1H19 has been progressively filled up by orders diverted from China. Indonesia operations are expected to return to the black by 4Q19, ” it said.
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