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VS Industry Bhd
(Dec 17, 82 sen)
Maintain hold with a lower fair value of RM1.31: VS Industry Bhd’s first quarter ended Oct 31, 2018 (1QFY19) results were below our expectations at RM54 million, although accounting for 30% of our full-year forecasts and 26% of consensus estimates as we anticipate weaker quarters ahead. This is after stripping one-off net losses of RM15 million, mainly from the loss on the disposal of its subsidiary and retrenchment costs related to its China segment, as well as net foreign exchange loss.

1QFY19 core net profit rose 35% despite a marginal increase in revenue after taking off one-off net losses of RM15 million, versus a net gain of RM2 million in the previous year. Profit before tax (PBT) declined 8% mainly affected by VS Industry’s Indonesia and China segments, despite improvements in its Malaysia segment.

For the Malaysia segment, PBT rose 7% amid a 9% expansion in revenue to a record high of RM887 million due to higher sales orders from VS Industry’s key customers. For the Indonesia segment, on top of a 30% reduction in revenue, the segment recorded a loss before tax (LBT) of RM1 million versus a PBT of RM4 million in the preceding year due to a weakening rupiah.

The China segment’s revenue continued to decline 27% amid lower sales orders, while LBT widened approximately RM3 million as the suboptimal utilisation rate impacted the ability to offset fixed costs. This was further exacerbated by a loss on the disposal of a subsidiary amounting RM5.4 million in 1QFY19.

Prospects in the second half of FY19 are expected to dampen due to expectations of a declining order flow from a key customer for its Malaysia segment. However, VS Industry is currently in serious talks with more than five prospective multinational corporation (MNC) customers to secure new orders that would fill up the excess capacity. The group is also continuing with its cost rationalisation to streamline operations in its China segment in light of uncertainties from the US-China trade war, higher operating costs and an intense competition.

We maintained our “hold” call on VS Industry following the recent fall in its share price as we believe its prospects have been fairly factored in. A key upside risk to our outlook is the potential in securing new orders from prospective customers to fill up its additional capacity at its facilities. — AmInvestment Bank, Dec 17

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