VS Q4 FY20 Review and Look Forward Q1 FY21

 

The Q4 FY20 revenue of RM882.6mil was 15% lower compared to preceding year corresponding quarter.  PBT meanwhile grew 45.7% to RM71.3mil. The improved earnings for the current quarter despite decrease in revenue was mainly attributable to much smaller losses from the operations in China following restructuring and streamlining of operations by adopting an asset-light and lower-cost model.

For the financial year ended 31 July 2020, the Group recorded a revenue of RM3,243.2 million, a decrease of RM735.2 million or 18.5% as compared to RM3,978.4 million recorded in the preceding year. Profit before tax stood at RM151.6 million, having dropped by RM30.3 million or 16.7% over the same period.

The reduced earnings for the cumulative quarters was mainly due to losses of RM26.9 million incurred during the temporary closure of factories following the Movement Control Order (“MCO”) that was imposed in the preceding quarter, in addition to lower orders from a key customer.

Malaysia segment Q4 FY20 result had surpassed my estimation as mentioned in previous post. PBT was RM93mil compared to my prediction of RM55mil. However, Indonesia and China Segments were having losses serious than I thought. Although Indonesia expected to record 2nd write off of RM2.6mil, the net loss after excluding the write off was actually worsen. No statement was made by the management on the increase in the loss for China segment. 

A summary compilation of research houses' analysis reports from VSI's briefing:

The floor care products has reaching the end-of product life cycle and we might see lower order flow from UK customer (Customer X). But the short fall orders can be covered by the newly secured motorized printed circuit board assembly (PCBA) and box-build jobs, in Aug 2020, which contributing RM200mil to FY21's top line. Production is set to begin in Dec 2020. Key customer X had contributed about 40% to VSI's FY20 revenue. 

VSI currently produces three models for US-based customer (Customer B), with two more slated for production by Dec 2020 and early 2021 respectively. On top of that, four additional models were secured and will begin  production by 2HFY21 bringing a total of 9 models confirmed for this customer. Due to the better orders flow, VSI had allocated a further 180k sqft to cater for customer needs, on top of the current 160k sqft. The Aminvestment mentioned the group may potentially secure up to a total of 12-13 models. 

Expecting higher sales orders in FY21 from coffee brewer and pool cleaning customer due to increase in demand post-lifting of Covid 19 and at-home consumption and some order diversions from China. Coffee brewer contributed 22% to VSI's FY20 revenue. While VSI achieved a record revenue of an estimated RM200mil from pool cleaning customer in FY20. FY21 revenue contribution from pool cleaning customer is targeted to increase by 50% YoY on higher orders in the pipeline. Among VS customers, pool cleaning customer dominates the highest margin of all. 

VSI recently secured the new US-based customer; Victory in Aug 2020. Currently the group is in the midst of completing the mold fabrication and tooling and targets to commence production of its two spray models by Q1FY21. 

Comments:

- We can only focus on Malaysia segment businesses as the board is actively looking to expand its current production capacity to cater for future orders from the US-based customer (Customer B) and future prospective clients. I don't expect any profit could be achieved from Indonesia and China segments in FY21.

- Expecting Q1FY21 revenue to increase compared to Q4 FY20 primarily contributes from Victory and US-based customer (Customer B) that cushion the slow down from UK customer orders. 

-  Q1 usually is the peak season for VSI. Hence,  with all those prospective orders mentioned in analysis reports, I am positive on the coming PBT to record RM85mil an increase of 20% from Q4 FY20 and reckon a EPS of 3.09sen for Q1FY21 with a 10% discount rate. 

- By anticipating 5%  profit margin gain from Malaysia segment in Q1 FY21 as compared to Q4 FY20, Indonesia segment will remain lower loss around RM3.9mil with the absent of impairment loss and China segment to be remained slightly higher loss on RM8.6mil in Q1 FY21. 

- Current PE of 42 at RM2.60 (13/12/20) is way higher than my expectation in earlier post. It turns out PE 42 is still around the average value, as the recent EMS player stock prices have been quite bullish. 

- I reckon that FPE will further reduce to 38.8 with the accumulate EPS of 6.70sen (3.09sen[F]+2.87sen-1.05sen+1.79sen)

- Target Price = RM2.68 with PE= 40.

Technical Analysis

Upcoming earning result is just around the corner, the bullish trend starts to lose its momentum. 

MACD is about to make negative crossing and its moving trend is showing a divergence pattern with price trend, which is not a good sign to trade. 

The next support line is around RM2.50 for the chart to retest the breakout point. If the price cannot rebound on this price but moves below the support line I would take profit on my holding with a potential of additional 3.2% drop. While the price rebounds, a good profit of 11% to the next resistance point at RM2.79 which it is worth to top up at this point for short term trading.

Overall, the price is already ahead of the fundamental. Unless VS can provide more positive news to stimulate the uptrend momentum such as getting new prospective clients with higher margin or bonus issues. It might not be a good price to hold for long term as of now. 

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. 

VS Q1 2020 Review

Brighter Performance ahead!

For the current quarter under review, the Group recorded a revenue of RM1,034.6 million, a decrease of RM38.3 million from RM1,072,931 million as compared to the previous year corresponding quarter, largely due to lower contribution from China. Profit before tax, meanwhile, increased 40.5% or RM18.4 million to RM63.7 million over the same period.

The report mentioned that, the improved earnings for the current quarter was mainly attributable to much smaller losses from the operations in China following restructuring and streamlining of operations by adopting an asset-light and lower-cost model, coupled with the absence of loss on disposal of a subsidiary amounting to RM5.4 million recognized in the preceding year corresponding quarter.

Malaysia segment posted a marginal decrease in revenue of RM4.2 million in the current quarter by comparison to previous year corresponding quarter. In tandem with the decrease in revenue, profit before tax dropped by RM1.3 million over the preceding year corresponding quarter. Profit before tax margin was relatively stable. 

Indonesia segment recorded profit before tax of RM1.1 million for the quarter under review as compared to loss before tax of RM1.3 million in the preceding year corresponding quarter mainly due to better product sales mix. 

China segment recorded a lower revenue for the current quarter as a result of lower sale orders completed. Losses narrowed significantly during the quarter under review due to lower operating expenses incurred following streamlining activities and adopting an asset light model with lower gearing structure. Additionally, there was also the absence of loss on disposal of a subsidiary amounting to RM5.4 million recognized in the preceding year corresponding quarter. 

For the current quarter under review, the Group recorded a higher profit before tax of RM63.7 million as compared to RM48.9 million in the preceding quarter, mainly attributable to the absence of impairment loss on plant and equipment of RM22.1 million provided by the operations in China as well as refund of investment cost of RM7.9 million from an associate. 

Referring to the latest asset and liabilities statement, trade and other receivables has increased 12% to RM1,116.936 million. Higher trade receivables is not good to company outlook. It will cause management to initiate impairment losses or write off on those payment that unable to collect back which further affect the financial performance. 

Loan and borrowing has slightly increased. Trade and other payables have reduced. 

Sales order has picking up lately, after the decline in sales orders from key customers in Indonesia segment during FY19, the management has bringing in more new sales orders to fill up the capacity. Hence, the better performance in Indonesia segment is mainly due to better product sales mix as mentioned earlier.  

Over china, the business is still remained challenging. Sales orders have contracted since early FY19 until now, but the losses in profit has narrowed down. 

Comment:

I forecast that FY2020 sales orders will remain stable and similar to FY19 performance as the overall consumer and business sentiments is lacklustre. However, a good point we can look forward in this financial year is the absence of impairment loss in china segment. 

PBT of FY19 is RM174.006 million. After excluding the impairment loss of RM5.4million recoginized in Q1 FY19 and RM22.1million in Q4 FY19, the overall PBT for FY19 should be RM201.506million. The EPS would be 10.07sen. Therefore, I reckon that the cumulative EPS for FY2020 would be similar to 10.07sen. Using PE of 15, the TP should be RM1.51 with curent price of RM1.32(14% upward). 

I will give a buy call for VS due to the coming quarter performance will definitely be better than Q2, 3 and 4 of FY19 with the picking up of sales orders from Indonesia segment.