VS Industry - Gross Margin Under Compression|
Author: kltrader | Publish date: Fri, 28 Sep 11:08
Fair Value : RM1.65 | Recom : Market Perform
FY07/12 results below expectations. VSI’s FY07/12 core net profit of RM33.5m (-5.5% YoY) accounted for only 76.0% of our full-year estimate. The results were below our expectations mainly due to: (i) lower-thanexpected gross margin of 12.2% (FY07/11: 14.4%) with increased competition in the local EMS industry; and (ii) higher losses of RM13.1m (FY07/11: losses of RM10.5m) from its China-based associates.
4QFY07/12 improved YoY but weaker QoQ. VSI’s 4QFY07/12 core net profit of RM8.1m was higher 102.4% YoY mainly due to a 40.1% jump in revenue. However, the 4QFY07/12 net profit was lower 22.0% QoQ despite a 27.9% QoQ increase in revenue due to a 0.4%-pt decline in gross margin and significantly higher losses (+366.5% QoQ) from its associates.
Fourth interim single-tier DPS of 6 sen declared. VSI declared a fourth interim single-tier DPS of 6 sen (4QFY07/11: 3 sen). This brought YTD DPS to 15 sen (FY07/11: 9 sen), which implies a net payout ratio of 70.5% and net yield of 10.1%.
Mixed outlook. Going forward, we believe VSI’s gross margin in FY07/13 will decline further when minimum wage for workers takes effect in Jan 2013. In addition, persistent weakness in global economic conditions does not bode well for demand for VSI’s contract manufacturing. Nevertheless, VSI is expecting increased orders from Keurig and its injection moulding expansion in Indonesia will cater for existing customers’ additional orders.
Risks. Key risks include: (i) weaker-than-expected global macroeconomic environment resulting in lower demand for consumer electronics products; (ii) loss of orders from key customers; and (iii) inability to pass through higher raw material costs may erode operating margin.
Forecasts. We cut our FY07/13-14 net profit forecasts by 28.0-33.7% to RM36.6m and RM38.9m respectively to reflect gross margin erosion and continued weakness in global economic conditions. We introduce our FY07/15 net profit forecast of RM41.3m.
Investment case. We lower our call on VSI to Market Perform (from Outperform) with a lower fair value of RM1.65 (previously RM2.08) based on a higher target PER of 8x (previously 7x) of its CY13 earnings. The target PER is benchmarked to its Bursa-listed peers and its 3-year average PER. While we believe VSI will face continued margin compression and global consumer demand headwinds, its attractive dividend yield should provide support to its share price.
Source: RHB Research - 28 Sep 2012