The Yellow Man - DIGI

Who is DIGI 

Digi.Com Berhad is one of the big 4 telco company in Malaysia. According to Source: Statista 2020, Digi has 18% of telecommunication market share in Malaysia.

Up to date, Digi has 10.68mil active subscribers and its 4G LTE and LTE-A network coverage have grew to 91% and 74% of the population nationwide respectively, also with the recent launched fibre to the home (FTTH) solution, Digi has 9,850km of extensive fibre network to serve 3.7 million households. 

Take a glance on Digi's financial performance indicators:

1. Digi has up to 99% dividend payout ratio, highest dividend yield among the telco companies.WOW!!

2. ROE of 206%!! Insane!!

3. EBITDA margin around 50% and market cap is standing at Rm30.945bil. 

The financial performance was so nice that I believe it attracts many dividend stock hunters including me.   

The company structure is quite simple. 

49% of Digi's share owns by its mother company, Telenor group and Digi's top management is also controlled by Telenor staff. Top 30 largest shareholders are mostly foreign and local funds which holding 86.49% of total issued shares, very high entry level for retails to play!

Yup, Digi is not a local company and I am not supporting buatan malaysia so far😆

Hmm...Everything looks so good. Is it good to invest in Digi? Let's dig into the latest quarter report that released recently. 

 

Digi reported a slight growth in revenue of 1.1% in current financial quarter as compared to previous corresponding financial quarter. However, PAT was down by 9.8%. Year to date, revenue was however trimmed by 0.6% to RM 4.59bil compared with the corresponding period last financial year of RM 4.62bil. PAT was also declined 13.7% Y-Y. 

                                     

Under Q3 FY20, Digi reported higher mobile service revenue of RM1.374 bil, up by 4% compared to preceding quarter primarily contributed by the prepaid segment to offset softening postpaid revenue as postpaid market was challenged by involuntary churns and plan downgrades due to softer affordability. Postpaid ARPU trimmed marginally to RM67 on the back of lower roaming contributions on closed international borders and overall weaker consumer spending due to Covid-19 effected interconnect ARPU. 

The prepaid subscriber base improved for the first time since 3Q 2019, thanks to the efforts by the management to grow its Malaysian base to offset the shrinking migrant business and their latest prepaid packages have meet consumer sentiments. Prepaid ARPU uplifted by RM4 Q-Q to RM33 alongside prepaid subscriber base expansion of 67k amidst heightened data competition. Digi recent product launches namely Digi Abadi and Digi Prepaid NEXT enabled price-conscious consumers to access to high speed internet connectivity via bite-size data passes. 

Total subscriber base improved by 57k users to 10.7 million whilst blended ARPU escalated RM2 to RM42, underpinned by the prepaid resilience and innovative postpaid offerings that drove quality and loyal subscribers. Device and other revenues chalked up 51.9% QQ and 37.6% Y-Y on encouraging take-ups for renewed PF365 plans built in with greater savings and flexibility.

 

Digi is also launching FTTH service since Q4 FY19. However, there is no significant revenue recorded in the quarter report. 

EBITDA margin slips to 50% compared to 53% in 3Q19 and 2Q20 respectively and 3QFY20 net profit fell by about 10% Y-Y due to higher device sales and the normalization of marketing cost. Meanwhile, opex increased by 3.9% Y-Y as the previous year included a non-recurring cost of RM17mil. Depreciation cost rose 6.8% Y-Y as Digi continues to invest in network expansion. Also an additional RM12mil provision for doubtful debt was recognized due to the group's commitment to manage bad debt risks in the current challenging economic environment. 

Balance sheet summary

Total Assets as at 30 September 2020 contracted to RM8.04 billion on utilization of internally generated

funds for loan repayments. As a result, total borrowings trimmed to RM2.77 billion, of which 78.1% comprised of Islamic borrowings. Hence, total liabilities was reduced to RM7.39 billion. 

A more detail summary was shown in the table, where cash & cash equivalents reduced from RM519 mil in previous quarter to RM365 mil contracting by 42.2%. Total equity was improved to RM644 mil but was lower compared to preceding year corresponding quarter. 

Comments:

1. Personally I feel that Digi focuses on the low-end market as ARPU for postpaid and prepaid are lower compared to Maxis. But Digi manages to generate higher profit margin in such competitive market. Apparently, Digi is very focusing in cost optimization to maximize the return to shareholders especially its mother company. Hence, investing in Digi can enjoy the same profit as Telenor group.  

In other word, Maxis has more room of improvement to expand its market share into the low-end market. 

2. Would it be too late for Digi to join in fibre network market? Digi has partnered with Time DotCom to provide fibre footprint to more locations and can connect more malaysians residing in high-rise residential areas. With the same packages offering among three players, would Digi be a little too pricy? It might be the reason where no significant revenue was recorded since the package was launched back in Q4 FY19. 

3. Continue shrinking in revenue, net profit as well as dividend payout has shied away traders. Telco industry is now facing a shift from voice & SMS to internet usage and from prepaid to postpaid that caused revenue to drop. 

Looking at one year price trend, most of the telco stock prices are in negative return. Maxis and Digi were slightly above the telecommunications & media index. We can also spot that solid line connection (Fibre network) business provides more upside in stock price. Hence, it is clear that the fibre network business has more future capacity expansion compared to data internet business which has been quite saturated. 

As a consumer, I have to agree that solid line can provide a more stable internet connection with unlimited and faster streaming speed compared to internet data plan provided by telco companies. As smart phone getting more important in our daily life, a more stable connection and faster streaming speed is essential. Hence, I can see Digi emphasizes on the network expansion work in order to enhance its network quality, widen its fibre footprint and also recently Digi announced a collaboration with ZTE Corporation for its nationwide Radio Access Network modernisation..and bla..bla..bla..In short, Digi spend more money to upgrade network facilities. 

4. I anticipate that the Q4FY20 revenue will slowly pick up as the some additional sales will contribute from Phone Freedom 365 program as usually Q4 will have new handsets launching. 

Technical Analysis

Price is moving in a major downtrend, lower low and lower high. Next support line is RM3.95, if the price breaks below, the next support line would be RM3.82.

At the moment, I still can't see any slow down on the downtrend. Although Digi provides good dividend payout but overall it is a loss making investment. I will continue to observe the financial performance to look for the entering point when business start to recover. 

Conclusion

I expect higher sales from phone freedom program and higher prepaid subscription from the coming Q4FY20. Hence, I reckon that the EPS could be achieved at 4.2sen. As such a full year dividend would be around 16sen.   

By taking PE at 25, TP should be RM4.08 and dividend yield of 3.92%. 

Overall, it is not attractive to invest.

Pohuat Q3 FY20 Review

 Would furniture stocks be the next "glove" trend?

Overall Q3 FY20 financial performance was commendable despite this quarter was having some impact from MCO. Pohuat recorded a lower revenue of RM132.8 mil under Q3 FY20 compared to RM 164.8mil in the previous corresponding quarter last year. The decrease in revenue was mainly affected by reduced production levels and lower demand from customers amidst the covid-19 pandemic. However, profit was recorded marginally higher compared to the corresponding quarter last year by 2%. Let's see how did Pohuat make it.

A summary of revenue recorded for both regions in Malaysia and Vietnam from Q1 FY29 until the recent. Undoubtedly, the revenue from both regions were badly affected by the reduce in sales orders during the pandemic breakout period and operation activities were suspended in Malaysia from 18 March to 4 May. But we can see that the revenue trend has slowly recovered. 

The group reported that the operation in Malaysia resumed on 4 may 2020 following the relaxation of the mandatory movement control order announced by the Malaysian government. Shipment was lower in May 2020 as Pohuat managed supply and logistics restriction following the first phase of the movement control in Malaysia. During the month of May, the group focused on fulfilling orders which were previously placed or rescheduled by buyers. Operations however improved in the subsequent months of June and July 2020 as production has ramped up for orders that are confirmed by customers.

In Vietnam, Pohuat also registered lower level of shipment as their production and shipping schedules had to readjusted to in line with customers’ requirements and shipping schedules. Orders and shipments from Vietnam were reported higher in the months of June and July 2020 as US importers and retailers adjust their inventory restocking levels in line with indications of recovery of demand in the US.

Although Pohuat recorded a lower revenue, pretax profit margin for Malaysia region was higher than previous corresponding last year. The management explained that the higher gross profit margin was due to lower costs and more efficient use of raw materials. Selling expenses as a percentage of sales were slightly lower during the reporting period due to lower level of shipment while fixed administrative expenses as a percentage of sales inched up due to the lower turnover during the current reporting period. In short, lower material cost, less subcontracted parts were use and reduced on overtime cost. 

For Vietnam region, the gross profit rose slightly due to the efforts in controlling manufacturing costs despite the lower labour efficiency from rehiring of production workers. 

Prospect highlight from the management:

- US economy experienced the sharpest declines in decades, US GDP falling by 16% under second quarter of 2020

- US furniture importers rescheduled shipments and held back orders in the second quarter of 2020 due to the unprecedented movement restrictions being imposed on most states

- Furniture retailers in the US reported booming business in June and July 2020 from pent up demand following two months of near complete shutdown in retail activities and a spike in demand for home furniture as more and more American stay and work from home

- The U.S. Department of Commerce reported that the furniture and home furnishings store sales increased 33% monthon-month in June 2020 while the retail sales increased to USD524 billion, nearly back to pre-pandemic levels.

- The management announced that the group have received encouraging order over the last 2 months and now have better visibility on order shipments until February 2021.

Comments:

1. Q3 performance was commendable and the malaysia profit margin was surprised me. In fact, with the lock down imposed during Q2 period, it shows that there are rooms of improvement for the production processes such as:

- to automate the production machines to cut down relying on man power/foreign workers and reduce the overtime cost 

- to fabricate or produce those subcontracted parts to further reduce down the material cost

2. Pohuat benefits from low material cost and strong orders for the coming 2 quarters, revenue and profit will likely to recover back to pre-pandemic level. 

3. I believe Q4 FY20 performance will be the best throughout the year. I reckon that Malaysia region PBT could achieve RM14mil due to the seasonal sales cycle and other factors such as lower material cost and stronger USD/RM, while Vietnam PBT likely to improve to around RM9mil, similar to Q4 FY19. The Q4 FY20 EPS to be 7.14sen with a 80% discount factor. 

FY20 EPS = 19.64sen 

Forecast PE =10

Target Price = RM1.96 (42% potential upside with current share price at RM1.38)

4. Pohuat is having 50 sen net cash per share by now. It is still financially strong to pay dividend amidst other companies have postponed the dividend payout. 

5. As per my last blog mentioned, I have reduced my holding in Pohuat early of the year due to the lower sales season and unclear effort from the management to lower down the operating cost, I would monitor back Pohuat as it is still undervalued with P/B ratio of 0.83.

Technical Analysis

Pohuat price is in a bullish trend. Support line at 1.37 & Resistance line at 1.56. It is still safe to buy around 1.40 with a good risk and reward ratio. 

Conclusion:

Anyway I don't anticipate furniture stocks can be trending like glove stocks as the sales orders are just recovered to pre-covid level. 

My Old Good Friend "Pentamaster"

Penta has been in my watchlist for quite long time already. I traded Penta several times before this blog was started. This is the first post on Penta and I am not holding any of this stock at the time of writing. 

A Summary of today's Corporate Insight with Pentamaster

Mr Yong started with company overview, as we can see that Automated Test Equipment (ATE) was the major contributor to the group's revenue, consisting more than 85%. Factory automation solutions (FAS) contributed around 13-15% of the revenue. During 1H FY20, FAS sales had gone up and contribution in revenue had improved to 32.6%.

 

Penta has two main factories, one is located at Bayan Lepas and another is at Batu Kawan. Based on Ms Joo comment, currently Bayan Lepas plant is running at 100% full capacity and Batu Kawan is running about 60-80%. 

Looking at this slide, it shows the difficulty for Pentamaster to carry out projects for their clients during this pandemic. Mr Yong mentioned that no one has come prepared for this pandemic, the management plans to set up present outside of Malaysia to solve the restriction. 

Reason of going HK listing is to serve China market and Penta has benefited on the trade war. 

In short, Penta Malaysia stock price has been overpriced, Penta HK is still worth to look into. 

A newly set up subsidiary Pentamaster MediQ where the group has diversifying their businesses into medical segment which will show in other slides. 

Mr Yong has shown how Penta transform their business into customize equipment maker until integrating factory automation solutions to their customers.  

The latest 3D sensing module complete assembly line can help to assemble up to nano meter scale of sensors into smart phones. Meaning this equipment is very precise!!

Based on the management research, malaysia is one of the largest medical product exporter for catheter other than gloves. The acquisition of TP Concept Sdn Bhd can help to set up medical machines to produce single use pen needle and catheter. 

Currently Penta is making the prototype for medical equipment while waiting to get certified from US and Malaysia departments. Expected 2022 will sell into medical market. Penta will work with distributors to push into local market. 

From the management internal research reported that those medical equipment having around USD6.8bil market and with 6 to 11% growth rate.   

Mr Yong said Pandemic didn't slow down the chip manufacturing spending rather boost their sales on electronic products. 

Penta's major market is on Tier 1 and 2 phone manufacturers. Due to intellectual properties issue, many test equipment have to be customized based on customers' requirement. Although Penta do have competitors but many are standard test equipment manufacturers such as Vitrox and Mi.

Automotive become another crucial sector for Penta to venture into. As mentioned in Q2 FY20 report, Penta covers IGBT, AC/DC power inverter, battery bank, capacitor and car dashboard assembly and test handling equipment which mainly supply to electric vehicle industry. 

After that Ms Joo presented on the financial performance. She highlighted that the management had transformed its business during 2016 to focus on customize test equipment and the transformation had done well. Further to that, the management would like to diversify their business to have a more evenly revenue contribution. 

Talking about 1HFY20 performance, it was within the group expectation as the disruption on supply chain. Ms Joo mentioned that the revenue cannot be recognized if the project yet to sign off by customers. Usually customers place order, a 6-8 weeks lead time for ATE project to be delivered and installed. Deposits will be placed together with the purchase order, those deposits will record under contract liabilities in balance sheet. Projects that have not been delivered, installed or commissioned will record under inventories.

Automotive segment is having higher profit margin compared to telecommunication due to the complexity of the testing procedure. While medical device is having higher profit margin than automotive mainly because medical device require higher precision. 

Regarding to dividend payout ratio, so far no written policy. The chairman deems to maximize the return for the existing fund the fund is best to invest into other segments. 

Ms Joo presumed a more balance revenue contribution from all segments in next 3 years. Pioneer status will be expired after 2026, 6 more years to go.         

Not much contribution will see from low cost ventilator, at the moment it is still a prototype and waiting for approval. 

Let's see how is Penta Q2 FY20 financial performance.

The group recorded a decrease of 14.7% in revenue for current quarter compared to the corresponding quarter last year. This was mainly due to the unprecedented Covid-19 pandemic that impacting the group's operation as supply chain had been disrupted and global lock down on cross boarder travelling. 

ATE segment recorded a decrease in revenue by RM35.6 million or 33.5% to RM70.7 million in the current quarter as compared to the previous corresponding quarter last year. The drop in revenue under the ATE segment for the financial period ended 30 June 2020 was the result of the deferment of a timely revenue recognition caused by the disruption in project shipment and site installation where logistic and travelling restrictions impacted business activities of this segment. The MCO imposed by the Government of Malaysia from 18 March 2020 to 12 May 2020 as part of its effort to contain the Covid-19 pandemic has also impacted the Group’s production capacity in the second quarter where limited workforce were allowed to operate at the Group’s production premises at any one time. As the Group’s test equipment and solutions are exposed to a wider end market application and a more diverse industry base, the global technology advancement and momentum across various industries will continue to provide a growth platform for the Group’s ATE segment in the immediate term.

FAS segment recorded revenue of RM32.9 million in the current quarter as compared to revenue of RM21.5 million in the corresponding quarter last year, representing increase of approximately 53.0%. The increase in revenue from the FAS segment during the financial period ended 30 June 2020 as compared to the financial period ended 30 June 2019 was mainly due to contribution from the newly acquired subsidiary, TP Concept Sdn. Bhd. and the sustainable demand on the Group’s proprietary i-ARMS (intelligent Automated Robotic Manufacturing System) solutions from its consumer and industrial products segment as the adoption of industry 4.0 and artificial intelligence gained traction as part of the manufacturing sectors digital transformation.

Looking at the balance sheet, inventories had not much changes in values. It could be assumed that production capacity was being controlled just to deliver projects that able to commission at site. Contract liabilities on the other hand reduced by 51.8% from RM39.385 mil Q1 to RM 18.946 mil in Q2. It was aligned with the report where higher revenue recorded in the current quarter under review compared with the preceding quarter mainly due to increase in sales from the ATE operating segment, some projects had fully commissioned under this quarter and hence, contract liabilities reduced. 

Comment: 

1. Q2 performance has no surprise and it was within my expectation as I anticipated that the impact of MCO to Q1 FY20 ATE performance might still persist in current quarter.   

2. Good news is the group has resumed cross border travelling for its project site installation, albeit on a more restricted basis. More sales had closed up in Q2 as mentioned earlier. I believe that Q3 FY20 will see recovery on revenue and profit from ATE segment. 

3. Contract liabilities running low, are sales picking up? Although the group has mentioned travelling has been allowed, paying new visits to potential customers for design discussion might remain uncertainty. 

4.  The management is promoting its new subsidiary "MediQ" to venture into supplying medical devices. The products can only be sold to market after certified by US and Malaysia department. It will only contribute to the group in 2022. 

5. I will remain my target price at RM3.57 with the continuous increase in percentage contribution from FAS and recovery in revenue from ATE by considering PE = 30 and FY20 EPS = 11.94sen (after bonus issue). 

Technical Analysis:

The strong bullish trend has ended after the stock price broken down the support line (Blue). Currently, price is moving in a side way trend, hovering around Fibo 0.618 as its next support line, once the price moves lower than that, another wave of sell down to this counter. MACD made a negative cross recently, which is a sell signal. 

I will wait to bottom-fish on this stock again when the price has gone lower enough. Penta is fundamentally strong and currently it is with net cash position.   

Homeritz Q3 FY20 Review

Q3 FY20 results was the worst since 2013 until now. But, it was above my estimation as I reckoned a loss making quarter would be announced in my previous review. 

https://peanutcendol.blogspot.com/2020/05/homeritz-q2-fy20-review.html

Overall revenue and PBT were reduced by 35.12% and 61.86% respectively compared with the corresponding period last financial year. Gross profit decreased from 18% to 7% mainly due to lower revenue recorded under this quarter. As I assumed Q3 would only be able to operate in mid of April with limited work force; like others, surprisingly the management mentioned that the Group started to operate since early of April. How the management did that is really raised my eyebrows. On 4th of May, all workers are allowed to come back to work. In short, a halt in their business operation for just half month. 

The group's revenue and PBT of 9MFY20 decreased by 4.44% and 5.63% respectively compared with the corresponding period last financial year. The decrease in revenue and PBT as mentioned in Q3 report were mainly due to the lower output. 

The Group’s revenue and PBT for the Q3FY2020 decreased by 43.51% and 55.82% respectively compared with the Q2FY2020. The decrease of revenue and PBT were mainly attributed the lower output as a result of business and operations faced temporary interruption during Q3FY2020 pursuant to the outbreak of the Covid-19 pandemic in Malaysia. 

Anyhow, I still suspicious on their financial performance. So, let's look into their assets management report whether the better profit recorded was contributed from clearing pending orders or old stocks. 

By comparing Q2 and Q3 FY20 reports, inventories were increased while trade and other receivables were not greatly reduced. Yet, trade and other payables were reduced. With those figures, I can conclude that Q3 revenue were from the output produced under the reporting period. 

Comments:

1. Overall I am satisfactory with Q3 performance. The performance is aligned with the sales trend in US partly stimulated by low interest rate. 

2. HLIB analysts reported that during the interview with Homeritz and Liihen managements, sales orders have been picking up recently to the level at the early of the year. 

Commented from HLIB analyst that:

"We expect the full impact of Covid-19 to be felt solely in 3Q19. From June onwards, we understand sales volumes have returned to pre-Covid-19 levels of 200+ containers per month. Going forward, US-China trade war will continue to result in US retailers and wholesalers increasing orders from countries outside of China. We expect Homeritz continue to benefit from this trend, as we note that sales to the US has increased from 4.5% of total FY19 sales to >12% currently. In terms of raw materials, Homeritz have guided that its supply chain has been relatively stable. Homeritz also mentioned it has been able to procure leather from India at a cheaper price."

3. Future prospect is looking good for Homeritz. By assuming that the Q4 FY20 EPS to be 2.66sen, similar to Q1 FY20 performance in revenue and PBT, the FY20 EPS would be Q1 2.66sen + Q2 1.93sen + Q3 0.82sen + Q4Forecast 2.66sen =  8.07sen

Taking PE = 8~10, target price to be RM0.65~0.81 (12~39.7% upside with current price at RM0.58)

Also, a buy call from HLIB at a target price of RM0.72

4. Risk that sales to be disrupted will be global political uncertainty such as US-China trade war, foreign workers shortage issue and second wave of covid-19 pandemic.  

In the news recently, the government has decided that only three sectors: construction, plantation and agriculture will be allowed to employ foreign workers in future to cut the nation's reliance on foreign workers. 

https://www.theedgemarkets.com/node/524024?fbclid=IwAR1Vw6Q2te81yfbIOuZ1fzjB7pi4Sy4qkz1BTQ9dT-gkofuCeNuvMeU-MSk

Technical Analysis:

The stock price is moving in a slow and steady uptrend. Recently, Homeritz has lost its bullish momentum. Overall, the price is still making higher high and higher low. Next support point would be 0.56 & 0.54.  

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. 

FPI AGM 25th June 2020

AGM Summary

1. Impact of Covid-19 to FPI

Covid -19 impact started from 18th March. Only two weeks of production loss during Q1 FY20, the net profit had decreased by 32%. The management mentioned that there was nearly zero sales for April and limited production on May that slowly increased its operation to 30-50%. June has recovered into 100% operation. 

2. Future prospect of FPI for FY20
Existing sales looks positive but the management remain cautious on year end sales.

3. New product mentioned in Annual Report explanation by the management

FPI jointly design & develop with Wistron (ODM) to introduce new products for clients as mentioned in Annual Report. Since last financial year (2019), the new product had contributed in revenue and it will continue this year. 

4. Question on implementation of automation mentioned in Annual Report

FPI invested new injection machines, CNC machines, fully and semi-automated machines as mentioned in Annual Report. The management mentioned that FPI is having difficulty to implement full automation to their production lines as automation is to reduce man power however there are so many models & products require man power to do packing. Hence, man power is still necessary for FPI. 

5. Reason of lower profit margin and higher revenue recorded in FY19

Revenue increased in FY19 however profit margin dropped. The management explained that due to the increase in basic salary and higher overhead costs. Lower profit margin will still maintain for the coming financial year as 3 more new products will introduce for customers by end of this year.

6. Impairment loss issue reported in FY19

Impairment loss on trade receivables of RM 2.6mil declared in last financial year was from one of the MNC customer. The customer was having cash flow issue and unable to repay within the 180 days of payment term. Hence, the management had to make impairment for this. 

Good news is the customer has cleared the payment and the management will write back the bad debt in Q2 FY20.

7. Concern of FPI clearing backlog orders

The management also mentioned that normally Q2 is normal season, FPI has its peak season during Q3. However, as the lock down happened on the mid of March, the management have to reschedule all the sales order shipment date to June. Therefore, production lines are having peak load in June. 

8. Contribution of new products

The management explained that new products have contributed some in FY19 revenue, if the sales order continues, the operating cost will reduce as initial investment on machinery was done in FY19.

9. Concern of cutting man power or pay cut during MCO 

The management said no staff been layoff. Top management level had cut transportation allowance and some incentives been cut for certain staffs, all staffs have gave full cooperation.

10. Future impairment issue 

At the moment no impairment loss recorded.

11. Supply chain issue during MCO

The management replied that no issue on the supply chain.

12. Concern on Wistron collaboration

FPI and Wistron work together as ODM and the product selling price is tallied to actual market price. 

During FY18, FPI purchased materials from Wistron and new products developed and sold under FY19 as shown in table below.  

13. Other expenses explanation

Foreign exchange gain/loss are recorded in other expenses/income statement.

Point of view after attending AGM

I believe that the coming Q2 will have more negative impact from MCO. I reckon that net profit will reduce by 50% compared to Q2 FY19 due to only one and half month of operation. Higher operating cost will cushion by the write back of bad debt of RM 2.6 mil in this quarter. 

Therefore, I expect EPS for Q2 FY20 to be 1.8 sen. Q3 FY20 will then be fully recovered to the normal condition if covid-19 pandemic is under controlled globally. Q4 FY20 will have higher revenue and profit margin. Hence, I believe Q3 and Q4 FY20 will achieve 6.4 sen and 4.3 sen  respectively. (With 20% increase in EPS compared to Q4 FY19 with the absent of impairment loss and three new products will be launching for customers; higher revenue & lower profit margin for new products)

Overall FY20  EPS to be 14.7 sen. Dividend payout based on 60% ratio expected to be 8.82 sen. 

By taking PE = 9 or 10, TP to be RM 1.32~1.47. Forecast DY for FY20 to be 6%.  

The current share price is still within the target price, buy when FPI trades at undervalue price.

Technical Analysis: 

Stock price is moving in a upward triangle pattern, waiting for price to break above or below the pattern. If the price is able to break above the triangle pattern, FPI will have strong upward momentum, else price will stay side way or downtrend. Support at RM 1.372 (EMA 30), resistance at RM 1.44 (Fibo 0.618).