VS In­dus­try, SKP Re­sources and Denko share the same prob­lems

The Star Malaysia - StarBiz - - Companies & Strategies - By TOH KAR INN karinn@thes­tar.com.my

THREE no­table elec­tronic man­u­fac­tur­ing ser­vices (EMS) com­pa­nies on Bursa Malaysia seem to be in the same predica­ment.

Their stocks are down around 30% since the first week of Jan­uary, when all of them hit their all-time highs.

VS In­dus­try Bhd, SKP Re­sources Bhd and Denko In­dus­trial Corp Bhd are in­volved in the man­u­fac­tur­ing of plas­tic parts and com­po­nents for global con­sumer and in­dus­trial prod­uct mak­ers.

In­ter­est­ingly, they all also have one more thing in com­mon.

They all have the same key cus­tomer – a par­tic­u­lar global elec­tri­cal ap­pli­ance maker.

So why have th­ese stocks been sold down? Gen­er­ally, the EMS sec­tor had a good run last year, with an in­crease in ex­ports, good sales recorded, and de­cent earn­ings gar­nered.

SKP Re­sources’ share price climbed to an all-time high of RM2.35 on Jan­uary 8, while Denko shares rose to an all-time high of RM1.95 on Jan­uary 18.

As for VS In­dus­try, the counter hit an all-time high of RM3.19 on Jan­uary 25.

Fol­low­ing that, there was a broad sell-down due to the ring­git ap­pre­ci­a­tion against the US Dol­lar and an im­pend­ing trade war by the US, both of which greatly im­pacted ex­port-driven com­pa­nies.

From the all-time high points to yes­ter­day’s close, the share prices of SKP Re­sources, Denko, and VS In­dus­try have dipped by 30.6% to RM1.63, 21.03% to RM1.54, and 26.7% to RM2.34, re­spec­tively.

For the first half of its fi­nan­cial year end­ing July 31, 2018, VS In­dus­try reg­is­tered a net profit growth of 32.3% to RM91.27mil, as com­pared to the cor­re­spond­ing pe­riod last year, which saw a net profit of RM69.01mil. De­spite that, the fi­nan­cial re­sults for the first half of FY18 were found to be be­low PublicIn­vest Re­search and con­sen­sus es­ti­mates, hav­ing ac­counted for an es­ti­mated 39% of full-year es­ti­mates.

PublicIn­vest, in a re­search re­port, said there were start-up costs with new as­sem­bly lines that came on-stream pro­gres­sively for VS In­dus­try, and th­ese lines would take time to reach op­ti­mal pro­duc­tion level.

An in­dus­try source adds that in the case of VS In­dus­try, a por­tion of long term in­vestors prob­a­bly took the op­por­tu­nity to take profit.

One dealer also points out that th­ese stocks have not been over­sold.

“If any­thing, they were chased up by in­vestors to reach high valu­a­tions that could not be sup­ported.

“At their cur­rent high teen price-earn­ings mul­ti­ple, th­ese stocks seem fairly val­ued to me, con­sid­er­ing cur­rent mar­ket con­di­tions,” he says.

An­other com­mon point which af­fected the three EMS play­ers’ share price per­for­mance was the ef­fect of the key cus­tomer’s plan to re­al­lo­cate or di­rect its re­search and de­vel­op­ment spend­ing to an­other seg­ment of prod­ucts. The three EMS play­ers have been man­u­fac­tur­ing parts and com­po­nents for two prod­uct seg­ments pro­duced by the said key cus­tomer.

Ac­cord­ing to a re­cent an­a­lyst re­port by Ke­nanga Re­search, when SKP Re­sources’ key cus­tomer said it was look­ing to re­jig its re­search and de­vel­op­ment spend­ing to­wards new por­ta­ble house­hold prod­ucts, this sparked rounds of sell-down across the EMS play­ers that have ex­po­sure to the older prod­ucts.

How­ever, this does not mean that the EMS play­ers are on the los­ing end.

An in­dus­try source ex­plains that while R&D spend­ing is to cease for that one prod­uct line, it does not mean that pro­duc­tion would come to an im­me­di­ate halt. “The prod­uct line which will not have new R&D ex­pen­di­ture go­ing for­ward, com­mands a lower pro­duc­tion vol­ume and lower sales.

“The ex­ist­ing prod­ucts of this line will still con­tinue to be sold, and pro­duc­tion shall ta­per off grad­u­ally.There will be no threat of im­me­di­ate vol­ume cut­off. Mean­while, the por­ta­ble house­hold prod­uct cat­e­gory, which has a his­tor­i­cally higher vol­ume and de­mand, will see a greater fo­cus from the key cus­tomer,” she elab­o­rates.

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