VS Industry seen actively engaging potential customers

TheEdge Tue, Jan 14, 2020 10:37am - 4 years View Original


VS Industry Bhd
(Jan 13, RM1.43)
Maintain add with an unchanged target price (TP) of RM1.70:
To recap, VS Industry Bhd’s revenue for the first quarter ended Oct 31, 2019 (1QFY20) declined 3.8% year-on-year (y-o-y) mainly due to weaker sales at its China operations, underutilised in light of the ongoing US-China trade tensions.

 
Nonetheless, its core net profit improved 19.7% y-o-y to RM47.9 million due to narrowing losses in its China operations, in tandem with ongoing efforts to streamline operations to reduce fixed costs. Its Malaysian operations remained steady in 1QFY20, with a flattish revenue of RM880 million or down 0.5% y-o-y and its pre-tax profit down 1.9% y-o-y.

We expect its production for Bissell — its US-based customer specialising in home care products — to ramp up meaningfully in 2020. We gathered the production of a carpet cleaner product — with the first delivery in October 2019 — only contributed minimally for 1QFY20. We expect the production utilisation rate to ramp up and sales contribution to gradually rise in the next few quarters.

During a briefing, VS Industry highlighted the production of two additional models is expected to commence soon — one a completely new model and the other an existing model. As of now, VS Industry expects to manufacture five models for Bissell.

We gathered that VS Industry is actively engaging potential customers, as it has a 180,000 sq ft production facility or about 10% of its total Malaysian production floor space ready to be filled. VS Industry is selective in securing new customers, preferring those with a strong product end-demand and an interest in forming long-term relationships.

We reckoned new customers are likely within the consumer electronics and/or home appliance segment, similar to its current client portfolio.

Our TP is based on 14 times calendar year ending 2021 price-earnings (PE), a 40% premium to the regional peer average PE of 10 times. We believe the premium is justified as VS Industry is a beneficiary of US-China trade tensions.

Key rerating catalysts are securing new large clients and/or its China operations performing better. Downside risks include a slowdown in orders from its key clients and a sharp rise in operational costs. — CGS-CIMB Research, Jan 9

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