VS Industry earnings hit by MCO

By ASILA JALIL

THE extended Movement Control Order (MCO) will likely halve VS Industry Bhd’s core net profit for its financial year 2020 (FY20).

Affin Hwang Investment Bank Bhd (Affin Hwang Capital) said in its research note yesterday, they trimmed the industrial mold manufacturer’s FY20 estimate core earnings per share (EPS) by 22%, taking into consideration the company would register a loss in its third quarter of FY20 (3QFY20) due to the extended MCO, as well as a slow recovery in 4Q.

“We think VS is still not out of the woods yet, and we cut FY21-FY22E core EPS forecasts by 5%-11%. We believe the bruised consumer sentiment and global economic slowdown are likely to dampen discretionary spending, especially upmarket consumer devices that VS is producing,” Affin Hwang Capital stated.

Despite receiving approval from the authority to operate at up to 50% capacity, VS’ Malaysian operations are still running below optimal levels for almost two months.

Affin Hwang Capital estimated the group’s pretax losses for 3QFY20 will widen to at least RM30 million and further losses are expected if the MCO is extended.

It said the losses will stem from wages of 7,000 workforces which is estimated to cost RM13 million (assuming minimum wages of RM1,200 per month). Other factors include depreciation costs of an estimated RM11 million and fixed and additional sanitisation cost of an estimated RM7 million.

“February’s full-month’s production could help cushion the impact, but we think losses are expected to balloon further if the MCO is extended,” it said.

The research house also maintained its ‘Sell’ call for the company and lowered its target price to 42 sen from 50 sen previously. The counter was last traded at 65 sen, almost double the target price.

Affin Hwang Capital added that although VS’ share price has recovered by more than 19% over the past month, there is little justification for it, especially if the pandemic prolongs.

The order flow from its key customers may also slow down in the coming months.

“We learnt from the video call that discussions with prospective customers have been put on hold due to travel restrictions amid the Covid-19 pandemic.

“While we are disheartened by this temporary setback, we still believe VS remains in a prime position to benefit from the trade diversification effects of the US-China trade war,” Affin Hwang Capital stated.