VS Industry Bhd
(March 27, RM1.02)
Maintain hold with an unchanged target price (TP) of RM1.05: VS Industry (VSI) reported the second quarter in the 2019 financial year (2QFY19) core earnings of RM38 million (-14% year-on-year [y-o-y], -16% quarter-on-quarter [q-o-q]), on the back of lower revenue of RM983 million (-12% y-o-y, -9% q-o-q). The weaker financial performance was mainly attributed to lower contributions from its China operations.

 
This brings its first half of the 2019 financial year (1HFY19) core earnings to RM78 million, which met 63% and 65% of our and consensus expectations respectively. Nonetheless, we deem the results to be within expectations as we are anticipating a weaker second half of the 2019 financial year (2HFY19). As such, we are maintaining our FY19-21 earnings forecasts.

The group declared its second interim dividend of a sen for 2QFY19, which is within our expectations

Its Malaysian operations recorded revenue of RM822 million (+5% y-o-y, -7% q-o-q) and profit before tax (PBT) of RM52 million (+13% y-o-y, -22% q-o-q) in 2QFY19, which formed 84% and more than 100% of group revenue and PBT. The stronger earnings on a y-o-y basis were mainly due to production ramp-up that was driven by higher sales orders.

Despite improvements in its 2QFY19 results on a y-o-y, we understand that sales orders from one of its key customers have declined from January 2019 onwards, which is only partially reflected in the current quarter. As such, we are anticipating a weaker 2HFY19.

On the positive front, upon securing a new contract with Bissell recently, management is in advanced negotiations with about five customers and is optimistic about winning more jobs in FY19, where the earnings contribution from these potential wins will filter through from FY20 onwards. The prospect of clinching new clients could pose upside potential to our FY20-21 earnings forecasts.

Its operations in China recorded a revenue of RM105 million (-59% y-o-y, -6% q-o-q) and a core operating loss of RM4 million in 2QFY19 (versus PBT of RM20 million in 2QFY18 and loss before taxes [LBT] of RM20 million in 1QFY19)

Despite its ongoing cost-cutting exercise since the second half of 2018, we understand that sales orders have declined significantly no thanks to the ongoing US-China trade war. The group has accelerated its cost-cutting exercise in view of declining sales orders. We gather that the downsizing will continue in the upcoming quarters.

We maintain our “hold” recommendation for the group with an unchanged TP of RM1.05, based on CY19 price earnings ratio (PE) of 14 times, which is equivalent to its five-year historical mean. — AllianceDBS Research, March 27