VS Industry Bhd
(March 27, 75 sen)
Maintain buy with a lower target price (TP) of RM1.18: VS Industry Bhd’s first half of financial year 2020 (1HFY20) results disappoints due to sharper-than-expected decline in sales from key customers. The near-term outlook is challenging given the movement control order (MCO) and a slowdown in global demand. Looking further ahead, FY21 earnings should stage a strong bounce from the low base as we foresee global demand and economy to gradually recover. The selldown on the stock could be overdone and current valuation is attractive considering the solid fundamental of the company.
VS Industry’s 1HFY20 core net profit of RM81.3 million (+1.5% year-on-year [y-o-y]) was below our expectation but within the consensus’ at 42%/47% of the respective forecasts. This is due to a sharper-than-expected slowdown in sales orders from key customers. Y-o-y, 1HFY20 revenue fell 9.9% due to the abovementioned reasons and the downscaled China operation. Notwithstanding, 1HFY20 profit before tax grew 13.1%, largely driven by reduced losses in China post business rationalisation.
Immediate term outlook is challenging with operation temporarily suspended due to the MCO. The saving grace is that the resultant delayed shipment will not be penalised following discussions with key customers and the balance sheet is strong enough to withstand reasonable impact. There could be pent-up demand after the MCO is lifted but we are not overly excited on the prospect. Global demand is likely to slow in view of the negative impact on the economy caused by the Covid-19 pandemic. Our FY20-FY22 earnings forecasts are trimmed by 31%/21%/17% to reflect the expectation and a lower sales order assumption from the key customer.
As our TP and call are based on the one-year forward view, we maintain “buy” on the stock notwithstanding the near-term earnings weakness. We forecast FY21 earnings to jump 35% from the low base as we foresee global demand and the economy to gradually recover in FY21. VS Industry is in a good position to capture the resurgence given its proven track record and expertise. The stock is trading close to -2 standard deviation and we reckon the selldown could be overdone — FY21 growth prospect and the sturdy balance sheet are currently being overlooked by the market. — RHB Research Institute, March 27
http://www.theedgemarkets.com/article/vs-industrys-fy21-profit-likely-jump-35-economy-recovers
