VSI outlook for FY20 weighed down by pandemic
KUALA LUMPUR: VS Industry Bhd’s (VSI) outlook for the remainder of the financial year 2020 (FY20) has been viewed as weighed down by the impact of the Coronavirus Disease 2019 (Covid-19) pandemic.
AmInvestment Bank Bhd (AmInvestment Bank) noted that for the first half of FY20 (1HFY20), VSI’s core profit declined six per cent year-onyear (y-o-y) mainly due to 12 per cent lower revenue in domestic and China operations and after excluding exceptional gain of RM3 million (compared with the one-off forex loss of RM5 million in 1HFY19).
This was offset by lower net finance costs and lower effective tax rate. Its profit before tax (PBT) margins improved by 1.3ppt mainly due to lower losses incurred in China where loss before tax (LBT) narrowed to RM7 million from RM24 million in 1HFY19 due to the group’s streamlining exercises which led to lower operating expenditure (opex).
However, the Movement Control Order (MCO) which was put in place to curb the spread of Covid-19 has halted VSI’s Malaysian operations. The research team noted that production has been halted since the 14-day MCO was announced on March 18, 2020 to contain the Covid-19 outbreak in Malaysia.
Despite being in the list of approved critical manufacturing sectors (the electrical and electronics sector), the group is still waiting for a reply from the Ministry of Trade of Industry (MITI) to know whether they would be able to resume operations under certain conditions for the remainder of the MCO which has since been extended to April 14, 2020.
Furthermore, VSI has yet to receive revision in orders from its customers but anticipates weaker order flows as the Covid-19 impact globally is expected to lead to muted sentiments for customers’ end products.
It also pointed out that the Covid-19 measures has disrupted discussions with prospects as the group’s discussions with prospective customers have been suspended due to travel precautions and restrictions imposed.
“Nevertheless, long-term prospects remain bright amid sturdy box-build order growth supported by its key customer and Bissell’s product launches which are slated over the next few years, its ability to offer turnkey electronics manufacturing services (EMS) solutions as a verticallyintegrated player, and narrower loses from China due to costsaving measures, but we believe the stock is fairly valued at its current price,” AmInvestment Bank opined.
It also noted that the Covid-19 has lesser impact on VSI’ overseas operations at this juncture. Its Indonesian operations saw minimal disruptions but the group expects the segment to break even for FY20 provided the outbreak does not worsen drastically. In China, production has resumed since Feb 17, 2020, with more than 70 per cent of production workers having returned.
“Its challenging operating environment is anticipated to still cause underutilisation of its facility (seen even prior to the Covid-19) but is expected to be mitigated by lower opex from cost optimisation efforts. The group maintains its earlier guidance on projected losses for China,” AmInvestment Bank said.
“Since suppliers in China have resumed production in midFebruary 2020, VSI anticipates only some minor delays in shipments and deems the situation to be manageable.
To recap, its Malaysia operation imports 30 per cent of its raw materials from China and the group had inventory up till early March 2020,” it added.