FW: Results: V.S. Industry (VSI MK; BUY; TP: MYR3.55) - Minor hiccups

 

V.S. Industry (VSI MK; BUY; TP: MYR3.55) – Minor hiccups

• Shortfall due to China ops. 1QFY18 core earnings of MYR47m met only 18%/19% of our and consensus FY18 forecasts, dragged by higher-than-expected raw material prices at the China ops. Going forward, we expect strong earnings rebound QoQ driven by (i) strong volume loading in China and (ii) much larger box-build orders at its Malaysia ops. Nonetheless, we lower FY18-20E earnings by 7% each, to account for lower margins at its China ops and incorporating a revised USD/MYR of 4.10-4.15 (from 4.30). We roll forward valuations to CY19 on an unchanged 17.5x PER (in line with peers) to derive a new MYR3.55 TP. Maintain BUY.
• Strong topline did not flow through in 1QFY18. Despite an all-time high quarterly revenue of MYR1.1b (+10% QoQ, +60% YoY) in 1QFY18, VSI was not able to convert this strength to core profit (-12% QoQ, +39% YoY), mainly due to losses at 43.6%-owned VSIG's China ops. Malaysia ops continued to be the key anchor to earnings, recording a 12%/39% QoQ growth in revenue/pre-tax profit on: (i) full quarter contribution from box-build production line 1 and 2, (ii) partial contribution from line 3 and 4 (started in Jul 2017), partially offset by (iii) pre-production costs for line 5 and 6, which started in end-Oct and early-Nov respectively. Due to this, we expect the Malaysia ops to report QoQ growth throughout FY18, showcasing its full potential in 2HFY18.
• Drag at VSIG is partly seasonal; better days ahead. Recall that VSIG rebounded strongly in 2QFY17, recording a pretax profit of MYR19m vs. a pretax loss of MYR5m in 1QFY17, on the back of a sizeable delivery of air purifiers to its client. We expect VSIG to see a similar trend in 2QFY18, with YoY growth potential too, taking cue from its 1QFY18 large pre-production expenses associated to new product testing. Additionally, we expect VSIG to announce contract wins as highlighted during its recently concluded rights issue.
• Making a name in the EMS space. We continue to like VSI for its ability to win contracts for new products notwithstanding potential manufacturing localisation in markets where its clients are experiencing phenomenal demand growth.

 

 

 

 

 

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