VS Industry, SKP Resources and Denko share the same problems
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.