VS Industry Bhd’s (VSI) results for the third quarter of its 2020 financial year have come in below consensus expectations, according to analysts, but the group remains positive on its longer term prospects.
The quarter, which ended April 30, saw VSI registering a net loss of RM19.5 mil, leading directly to a 43% slump in net profits for the financial year.
The loss, according to analysts, comes from the impact of the movement control order (MCO), which saw production halted, while fixed costs continued to be incurred.
“VSI posted a net loss during this quarter mainly due to the MCO imposed by the government from March 18, coupled with the losses incurred by its Indonesian segment,” explained JF Apex Securities analyst Lee Chung Cheng.
Lee also noted that fixed operating costs such as depreciation, staff salaries and financing costs continued to incur, which the drop in revenue by 45% quarter-on-quarter was unable to cover.
Still, VSI expects to return to profitability in the next quarter, given that operations have resumed following the easing of MCO restrictions, with the group now operating at full capacity.
“Amid a challenging operating environment, order visibility has shortened while discussions with prospective customers are still halted due to travel restrictions. Meanwhile, newer models of one of its US customer’s products had been delayed due to the MCO, but we gather that production has since started and is gradually picking up,” said AmInvestment Bank.
Still, Affin Hwang Capital analyst Brian Yeoh warns of uncertainties in the coming quarter, despite the group’s expectations of moving back into the black in its 4QFY20 as VSI ramps up production to cope with the existing backlog.
“Although we learnt that near-term orders remain intact, the overall order flow from customers was said to be shorter and could be lower year-on-year due to the challenging global outlook,” said Yeoh, adding that the dependence on the single major customer is a risk that the group faces.
RHB analyst Soong Wei Siang indicated that he remains unperturbed by the results, however, stating that the numbers are not driven by fundamentals. He also agrees with the group’s expectations of returning to the black in the next quarter.
“We highlight that management has remained committed to the policy of paying out at least 40% of net profit as dividends, and note that VSI is now in a net cash position,” said Soong, adding that the group’s coffers stood at RM147 mil at the end of its 3QFY20.
“We believe the worst is over and the earlier fear of a drastic slowdown in order volume has not materialised,” he added, stating that this justifies a higher valuation yardstick.
RHB maintained a buy call on VSI, with an increased target price of RM1.35 from a previous RM1.18.
Both JF Apex Securities and Affin Hwang Capital maintained hold calls, with the former upping its target price to 92 sen from 79 sen, while the latter maintained a target price of RM1.05.
AmInvestment Bank, however, downgraded VSI to underweight from a previous hold call, along with a lower fair value of 80 sen from a previous 83 sen, citing a recent run-up of VSI’s share price as the reason.
At 12.15pm, VSI’s shares were last done at RM1.02, up 2 sen, with 34.66 million shares traded. – June 24, 2020
