VS INDUSTRY BHD

By Maybank IB Research Buy (maintained) Target price: RM2.70

VS Industry’s (VSI) higher operational expenditures (opex) for its Malaysia-based operations have led Maybank IB Research to lower the net profit forecasts for the financial years of 2018 to 2020 (FY18-20) by 7% to 12%.

The increase in opex was mainly due to VSI’s inability to pass through higher labour costs such as foreign worker levy, and a specific input material price hike for older consumer electronics in production.

“In contrast to our initial expectations, we now believe that VSI will not be able to pass on the foreign worker levy imposed on its 8,000 foreign workers in Peninsular Malaysia, to its customers.

This will lead to higher costs by about RM14.8mil per annum for VSI.

“Any positive development here would translate to positive upgrade to our earnings forecasts. Coupled with higher-than-expected start-up costs for its boxbuild manufacturing lines for new consumer electronics in FY18E, we lower FY18 earnings by 12%,” said the research firm in a note.

To recap, effective Jan 1, 2018, all employers in Malaysia were made compulsory to pay the RM1,850 per person levy annually for their foreign workers in the manufacturing, construction and services sectors.

VSI will having a new boxbuild manufacturing line for new consumer electronics in May this year. In November 2017, the company added two more such manufacturing lines.

On VSI’s share price, Maybank IB Research said that a sector-wide de-rating coupled with lower earnings expectations have caused the stock to retrace by 25% in the last one month.

“The price-to-earnings ratio of 2019 is now down to just 14.8 times.

“We view this as a good opportunity for a re-entry given that VSI is still projected to grow earnings by compound growth annual rate of 19% from FY17-20.

“Yields are also getting attractive at 4% for FY19. Our house view’s base case is that some compromise will be reached between the United States and China, avoiding a fullblown trade war,” it said.