VS Industry’s (VSI) 1QFY18 net profit of RM46.0m (+37.3% YoY, +25.0% QoQ) is broadly in line with expectations, at 19.9% and 18.5% of our and consensus full year estimates. We anticipate a continued pick-up in production levels to underpin growth going forward, with possible earnings surprises from further capacity expansions and securing of more orders from existing and new customers. Growth in the current quarter remained robust, driven by a constant rise in new sales orders, particularly in its Malaysian operations. While we remain excited over VSI’s prospects, we are lowering our call to a Trading Buy as we see growth having been priced-in too far ahead at this juncture. Our target price is lifted to RM3.11 however (RM2.83 previously) as we roll over our valuation to an unchanged 18x multiple on its FY19 EPS of 17.3sen. A first interim single-tier dividend of 1.5sen was declared for the quarter.
Revenue for 1QFY18 was higher 59.6% YoY and 10.3% QoQ as the Group took on more box-build orders for some of its major clients. Indonesia made a particularly strong contribution in the current quarter, its revenue jumping 147.1% YoY to RM107.6m as it turned from a consignment-based to a turnkey manufacturer for one of its existing customers. China’s contributions slowed QoQ however, given the completion of its Perfect China contract. Going forward, management expects a continuing trend of rising sales orders to sustain growth going into FY18 and beyond, optimism we continue to share considering the growth aspirations of some of its existing key customers.
Net profit of RM46.0m (+37.3% YoY, +25.0% QoQ) was impacted by about RM6+m in losses incurred by its China operations, largely a result of higher raw material consumption in pre-production testing for new products. This was partly mitigated by an RM2.5m net foreign exchange gain. Operating margins were slightly lower for the quarter as more lines were commissioned, incurring higher costs in the process but without the resultant benefits given that production output has yet to hit optimal levels. This will progressively be normalized from 2QFY18 onwards.
Other developments. We gather the Group has secured replacement orders from Perfect China for another batch of air purifiers, though the quantum may likely be lower than the previous RMB400mn contract. Contributions should kick-in 2QFY18 onwards. There remains no word on NEP Holdings, with negotiations still on-going on the next best course of action. Recall that there was an offer from Hong Kong-based Ozer International for shares owned by the major shareholder. VSI has a tag along clause which compels any buyer to make a similar offer for its 20% shareholding. Whatever the outcome however, it will be positive to VSI. Sell, it will pocket a tidy RM56.4m gain on its RM60m investment. Keep, it will benefit from NEP Holdings’ contract with Haier in China, provided shareholders remain status quo.
Source: PublicInvest Research - 15 Dec 2017
