FW: Results: V.S. Industry (VSI MK; BUY; TP: MYR3.18) - Within expectations

 

 

Good morning,

 

V.S. Industry (VSI MK; BUY; TP: MYR3.18) – Within expectations

• Our estimates are unchanged. 1HFY7/18 earnings were within our expectation at 46% of our full-year forecast. Despite a slight QoQ weakness in 2QFY18, we believe that earnings would catch up in 2HFY18 as utilisation for VSI’s new box-build production lines gain traction with a key product launch recently by VSI’s largest client. We make no changes to our forecasts. VSI’s fundamentals are intact with visible growth over the next 3 years. Our MYR3.18 TP is peg to an unchanged 17.5x CY19 EPS (in line with peers). Maintain BUY.
• Slower QoQ earnings is a timing issue. 2QFY18 core earnings of MYR46m (-6% QoQ, +19% YoY) took 1HFY18 core net profit to MYR94m (+31% YoY), at 46%/44% of our/consensus FY18 forecasts. 2QFY18’s slower QoQ earnings was due to the Malaysian ops as revenue contracted 7%, attributed to seasonally lower contribution from Keurig. Coupled with higher start-up costs for its latest two box-build production lines for Customer X which did not hit optimal utilisation, pretax profit margin for the Malaysian ops weakened 1.8ppts QoQ to 6.1%; pretax profit fell 28% QoQ. Fortunately, this was cushioned by a turnaround in the China ops as revenue surged 76% QoQ.
• Expect stronger quarters ahead. We expect VSI to gain operational efficiency especially for the Malaysian ops in the coming quarters as volume shipment for Customer X climbs in order to fulfil demand for its newly launched flagship home cleaning products. On the assumption that all six box-build lines will achieve optimum utilisation, we expect VSI’s full earnings potential to be showcased in 2HFY18; we expect VSI to report stronger average quarterly net profits of MYR54-60m in the upcoming two quarters.
• Undemanding valuations. For a growth stock with a 3-year expected earnings CAGR of 22%, valuations are inexpensive at 13.9x CY19 PER currently. As VSI continues to gain traction with its existing clients, its newfound economies of scale could also open up opportunity for job wins from new clientele.

 

 

 

Ivan Yap | Analyst, Equity Research

Maybank Investment Bank Berhad (15938-H)
7^th Floor, Tower C, Dataran Maybank, 1, Jalan Maarof, 59000, Kuala Lumpur, Malaysia

Tel: +603 2297 8612 | Fax: +603 2284 2137
Email: ivan.yap@maybank-ib.com

 

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