VS Q3 FY20 Review

Q3 FY20 performance was shocking! Operation cost was way higher than my expectation furthermore, Indonesia segment operation losses widened. 

For Q3 FY20, revenue recorded RM505.7mil that lower than preceding year of corresponding quarter by RM382.6mil or 43% mainly due to temporary closure of factories following the Movement Control Order (“MCO”) imposed by the Government from 18 March 2020. This, coupled with losses

incurred in Indonesia, had consequently resulted in the Group suffering a loss before tax of RM26.9 million as compared to a profit before tax of RM38.2 million in the previous corresponding quarter. 

Malaysia segment performance had been quite stable since 2018, the performance pattern was then weaken in Q2 FY20 partly due to the impact from Covid-19 initial outbreak in Jan 2020 on the supply chain. 

Q3 FY20 situation was getting worse due to the lock down during the reporting period. 

Revenue & profit from Indonesia has seen slightly decreased, however, the losses getting widen under Q3 FY20 mainly due to a key customer filling for bankruptcy which reported in Aminvestment analysis report that RM3mil was written off in Q3 FY20 with a remainder of Rm2mil expected to be written off in Q4 FY20. Hence, the LBT will continue in the next quarter. 

For china segment, the management managed to stop the serious bleeding, in order to return into black it might take more time to recover. Therefore, a reduce in loss from China will help in improving the group's financial performance. 

Highlights in Q3 report:

1. Production in Malaysia was halted during MCO, low revenue recorded during the period was insufficient to cover the fixed overheads and financing costs. 

2. Less favourable sales mix and inventories written off had widen the losses in Indonesia segment. 

3. China operations was able to resume on 17 Feb 2020 instead of immediately after CNY due to lockdown imposed by the Chinese Government. Losses narrowed significantly due to lower operating expenses incurred. 

4. Operation in Malaysia resumed during the later part of April 2020, production pace has picked up steadily and is currently operating at full capacity. 

5. The group expects to return to profitability in the coming quarter. 

6. However, the discussions with prospective customers continued to be hindered by the restriction on international travels. 

7. No dividend was proposed during this quarter to shareholder. 

Summary on Aminvestment analysis report after the conference call was conducted with the management:

1. New automotive customer: VSI has signed a master supply agreement with a new customer to produce a complete set of a car part with revenue contribution expected to be less than RM50mil beginning FY21F. Despite the initial lower contribution, the group is positive on the longer-term potential for this customer.

2. Key UK customer orders: Expect lower order flow YoY in FY20 due to some of its products reaching end of product life cycle. Order visibility has also shortened from receiving a 12-month rolling forecast to now having a 6- month visibility up till December 2020.

3. US-based customer newer models resumed production: Recall that said customer saw a delay in the production of its newer models due to MCO. Since then, the production of its 2nd and 3rd models has started in May 2020, with two more models to begin production by end- 2020 and in Feb-2021 – a total of 5 models confirmed.

4. Coffee maker and pool cleaner maker orders less impacted: We have readjusted our order assumptions for both customers upwards as the negative impact on orders is less than we anticipated. Note that the upcoming 4Q and 1Q are seasonally stronger quarters for its coffee maker customer which could help offset declines in the group’s other orders.

5. Discussion with future prospects halted due to travel restrictions, as the progress on conducting audits and site visits were disrupted despite continuing online communications. Around two to three of the prospects are at the later stages of discussion.

6. Indonesian operations expected to incur losses for FY20, in light of a key customer filing for bankruptcy. As such, RM3mil was written off in 3QFY20 with a remainder of RM2mil expected to be written off in 4QFY20.

7. Continue loss-minimizing efforts for China: VSI’s operations resumed on 17 February 2020 but its operating environment is still challenging and under utilization of its facilities is expected to continue. However, the group will continue to streamline its operations for China in order to minimize its losses.

Summary on HongLeong Investment analysis report:

1. The report is aligned with Aminvestment while HLIB has further elaborated the decline in orders from key UK customer. 

"Currently, VSI is running 2.5 lines for their UK-based customer (from 3.5 lines) due to the end of product lifecycle in both floor care (1 line) and haircare (1.5 lines). For PCBA and battery pack, the run rate is expected to remain at suboptimal at 60%. Management also shared that the revenue contribution from their UK customer for FY20 will consist of smaller chunk of the pie (<40%). This decline however, will be offset by the increase in contribution from VSI’s other customers."

2. For the US customer, the group expected the contribution to be steady at RM60m per quarter. Note that the margin contribution for the US customer is higher than the UK’s. For the coffee brewer, management forecasted 1QFY21 to record a strong rebound due to the higher demand as customers stock up for Christmas and year-end sales. All in all, the outlook seems positive from this coffee brewer and the contribution for FY20 is expected to exceed FY19’s (c.RM400m). The contribution for the pool cleaner is expected to be higher for FY20 as well, benefiting from the shifting of production away from competitors.

Conclusion:

Indonesia segment losses expects to continue as 2nd write off will be in Q4 FY20, its losses might be cushioned by the recovery of Malaysia segment revenue & profit. China segment losses will still persist with around RM3.1mil in coming quarter. By comparing to Q4 FY19, the losses expects to greatly reduce from RM49.4mil to RM3.1mil. 

With the strong orders for pool cleaner and coffer brewer, I believe that Malaysia segment can achieve a PBT similar to Q1 FY20 with around RM55mil earning, while Indonesia and China segment will bring about RM3.5mil and RM3.1mil losses respectively. The overall PBT for Q4 FY20 I reckon to be RM48.4mil with EPS to be 2sen. Hence, FY20 EPS expects to be 5.35sen. 

By taking average PE of  its peers at 19.9. 

TP = RM1.065

The current price of RM1.26 which is 1.18 times overpriced. However, after seeing stock prices from glove sectors, there is no reason not to buy overpriced stock. As long as the future prospect is there. 

Technical Analysis:

Recently, stock price has broken out the resistance line (Red) and maintained its bullish momentum. Next support and resistance points are RM1.17 and RM1.32 respectively. 

The price is now above EMA200 trendline and MCDX has shown strong buying momentum on VS. This stock is now in a strong bullish trend, however, when price crosses below EMA200 and MCDX red color histogram has reduced below 25%, the bullish trend has ended.