FW: Update: V.S. Industry (VSI MK; BUY; TP: MYR2.70) -

 

 

Good morning,

 

We have a post briefing update on VSI today.

V.S. Industry (VSI MK; BUY; TP: MYR2.70) – Share price over-corrected?

• Lowering earnings and TP; maintain BUY. Post analyst briefing yesterday, we lower FY18-20 net profit forecasts by 7%-12% on higher opex at the Malaysian operations, affected by VSI’s inability to pass through (i) higher labour costs (i.e. foreign worker levy); (ii) a specific input material price hike for older consumer electronics in production. Alongside a regional de-rating of technology names due to concerns of a US-China trade war, we lower our CY19 PER target for VSI to 16x (+1.5SD) from 17.5x to derive a new MYR2.70 TP (from MYR3.18). We believe there is an over-correction in the share price. Maintain BUY.
• FY18E hit by start-up costs and higher opex. In contrast to our initial expectations, we now believe that VSI will not be able to pass on the foreign worker levy imposed on its 8k foreign workers in Peninsular Malaysia, to its customers. Recall that effective 1 Jan 2018, all employers are responsible for paying the MYR1,850 per pax levy annually for their foreign workers in manufacturing, construction and services sectors. This will lead to higher costs by e.MYR14.8m p.a. for VSI. Coupled with higher-than-expected start-up costs for its box-build manufacturing lines for new consumer electronics in FY18E (2 new lines in Nov 2017, 1 more in May 2018), we lower FY18E earnings by 12%.
• Lower FY19/20 EBIT margins by 0.5/0.5ppts. On the same note, we also lower FY19/20 net profit forecasts by 7% each, assuming the worst case scenario whereby VSI will not be able to recoup the foreign worker levy from its key customers despite still on-going discussions. Any positive development here would then translate to positive upgrade to our earnings forecasts.
• Valuations have turned attractive. A sector-wide de-rating coupled with lower earnings expectations have caused VSI’s share price to retrace by 25% in the last one month. CY19E PER is now down to just 14.8x. We view this as a good opportunity for a re-entry given that VSI is still projected to grow earnings by 19% (CAGR) from FY17A-20E. Yields are also getting attractive at 4% for FY19E (based on a DPR of 50%). Our house view’s base case is that some compromise will be reached between US and China, avoiding a full-blown trade war.

 

 

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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