Choosing between VS Industry and SKP Resources

TheEdge Tue, Sep 05, 2017 04:00pm - 6 years View Original


VS Industry Bhd and SKP Resources Bhd are two of the largest home-grown electronics manufacturing services (EMS) providers in Malaysia.

Besides the fact that both the Johor-based companies are in the same business and serve some common customers, it is an interesting coincidence that the families that own the companies have the same surname — Gan.

Today, VS Industry is one of the top 50 EMS corporations in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities.

As for SKP Resources, it is one of the country’s fastest-growing integrated contract manufacturers, catering for the electrical and electronics, industrials, automotive and food and beverage industries.

Despite the business rivalry, not many may be aware of the unique and mutually supportive relationship between VS Industry and SKP Resources that has developed over the years.

Occasionally, VS Industry will supply PCBs and battery packs to SKP Resources, while the latter will supply common plastic parts to the former.

Simply put, they are friendly competitors.

At The Edge Billion Ringgit Club gala dinner last year, when VS Industry managing director Datuk Gan Sem Yam walked on stage to receive two corporate awards, SKP Resources executive director Ivan Gan Poh San was seen standing up and cheering for him.

The show of support indicates the respect Poh San, who is the son of SKP Resources’ controlling shareholder Datuk Gan Kim Huat, has for his competitor.

Likewise, Sem Yam shares the same respect for his rival, saying SKP Resources is “a good company that is doing very well”.

“I have known SKP Resources’ Datuk Gan [Kim Huat] for a long, long time. We played golf together with one of our common Japanese clients about 20 years ago — that’s how I met him. Subsequently, we had another common British client. Our paths have crossed many times,” Sem Yam tells The Edge.

Both companies delivered strong financial performance in the last three financial years.

VS Industry’s profit after tax saw a three-year compound annual growth rate of 39%, from RM43.9 million in the financial year ended July 31, 2013 (FY2013) to RM117.9 million in FY2016.

For the nine months ended April 30 this year, it reported PAT of RM119.5 million — surpassing its full-year earnings for FY2016, thanks to higher sales orders from existing key customers.

Meanwhile, SKP Resources recorded a three-year PAT CAGR of 52%, from RM29.3 million in the financial year ended March 31, 2014 (FY2014) to RM103.3 million in FY2017.

It is noteworthy that its profitability fell to a new low for the nine months ended Dec 31 last year, mainly due to short-term cost pressures from the hiring of higher-cost contract workers due to policy changes, as well as teething issues related to the ramp up of new products. Fortunately, the group saw improved results in 4QFY2017.

 

VS Industry outperforms SKP Resources

In terms of share price performance, VS Industry has risen 68% year to date. It closed at RM2.37 last Thursday, giving the company a market capitalisation of RM2.85 billion.

In January this year, Sem Yam told The Edge that he aims to almost double VS Industry’s market capitalisation to RM3 billion within the next five years. Now, it looks like his target may be met much earlier than he had anticipated.

SKP Resources, however, rose only 14% during the same period. It closed at RM1.47 last Thursday, giving the company a market capitalisation of RM1.83 billion.

So, which of the two EMS players is a better bet?

A quick check on Bloomberg shows that VS Industry and SKP Resources only have upside potential of 1.3% and 4.1% respectively, should the stocks hit their consensus target prices of RM2.40 and RM1.53.

At the moment, six research houses have a “buy” call on VS Industry while RHB Research has given it a “hold” recommendation.

Meanwhile, four research firms have a “buy” call on SKP Resources and two — UOB KayHian and RHB Research — have a “hold” recommendation.

To recap, VS Industry was still trading at a trailing 12-month price-earnings ratio (TTM PER) of 13 times in early January this year. In comparison, its closest rival SKP Resources was trading at a TTM PER of 17 times (see PER charts).

As VS Industry has outperformed SKP Resources since the beginning of the year, the former is now trading at a higher TTM PER of 21 times while the latter’s remains at 17 times.

Commenting on the improving stock valuation, Sem Yam opines that the PER of 21 times is no more than what the company deserves.

“Internally, I think our shares are fairly valued, but there is still room for growth. That’s because we are looking at a double-digit growth in turnover and bottom line for FY2018,” he says confidently.

He adds that globally, VS Industry benchmarks itself against Flex Ltd — an American multinational technological manufacturer based in Singapore — whereas SKP Resources is its closest peer locally.

The Nasdaq-listed Flex, formerly known as Flextronics International Ltd, is also trading at a TTM PER of 21 times. YTD, the counter has gained 9% to US$15.63, giving it a market capitalisation of US$8.3 billion.

Sem Yam says VS Industry was awarded vertically integrated (VI) status by a British client — best known for its high-powered vacuum cleaners — last year. It is believed to be the first VI status in Malaysia to be given by the brand, which is globally renowned for its consumer electrical products.

Moreover, VS Industry is one of the few local EMS companies with in-house PCB and battery-pack assembly capabilities, and hence is able to provide one-stop manufacturing solution to its clients.

“We also have a more diversified customer base. I suppose for these reasons, the market is giving us a premium, as investors have more confidence in us,” says Sem Yam.

VS Industry has three major clients, namely Keurig Green Mountain Inc (a US-based hot beverage system company), Zodiac Pool Systems Inc (a global manufacturer of pool and spa equipment) and the British company. The three collectively contribute about 60% to the group’s turnover.

In a report dated July 20, Kenanga Research analyst Desmond Chong says SKP Resources is a laggard despite having better manufacturing capabilities.

“Among the major EMS players in Malaysia, SKP Resources has been trading as a laggard with two-year forward PER of only 10.4 times, as opposed to other EMS players trading at two-year forward PER of 12 to 13 times with PCB assembly capability,” he adds.

According to Chong, even with very conservative projected earnings for FY2019, which is 8% below the consensus, SKP Resources is only trading at 11.1 times — still lagging its peers.

“We reckon that the premium for its peers stems from the more complete manufacturing capabilities. Now, with the group’s in-house PCB assembly capability coming in place, coupled with the resolution of previous problems, we see better risk-reward ratio from here,” he says.

When contacted, SKP Resources’ Poh San declined to comment for this article.

 

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Comments

黄晨
Like · Reply
actually vs the value is too higher the share price actually is unreasonable up how come the price one month can up 0.50 cent .I suggest all the vs share Holder or investor sell out the vs share the value actually is 1.80only
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ria marina
1 Like · Reply
yess skpress
Mr K
1 Like · Reply
so we should go for skpres?

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