VS- bottom-line continues to deteriorate

Result Update

For QE31/1/2013, VS's net profit plummeted 100% q-o-q & y-o-y to RM40k while revenue dropped 29% q-o-q or 12% y-o-y to RM234 million. VS's bottom-line dropped caused by lower sales & lower profit margin (due to fierce competition) and loss arising from dilution of interest in an associate in China amounting to RM5.9 million.


Table 2: VS's last 8 quarterly results


Chart 1: VS's last 32 quarterly results

Valuation

VS (closed at RM1.39 yesterday) is trading at a PE of 8.7 times (based on last 4 quarters' EPS of 16 sen). If the bottom-line continued to deteriorate, VS's PE ratio may expand in the next few quarters.

VS- an integrated electronics manufacturing services (EMS) provider- is a cyclical stock. As such, a good gauge of VS's potential low in a down cycle would be its Price to Book (PB) ratio. In the previous trough in early 2009, the PB ratio hit a low of 0.4 time. Currently, the PB ratio is at 0.6 time. VS would only revisit the low of 2009 if its financial performance continued to deteriorate. In such a scenario, VS may hit a low of 80-90 sen (assuming a PB ratio of 0.4 time).

Such a negative scenario may not pan out given signs that the global economy is slowly recovering. In my opinion, the likely scenario is that VS's financial performance may recover in the next few quarters.

Technical Outlook

VS is now in a downtrend line (R2-R2), with resistance at RM1.70. Its support may come from the curving line, C-C2 at RM1.30. If this curving line is violated, VS's next support would be the horizontal lines at RM1.20 & then at RM1.00. In an extreme situation, it may test the 'horizontal' line, SS at RM0.85-0.90.


Chart 2: VS's monthly chart as at Mar 26, 2013 (Source: Tradesignum)

Conclusion

Despite poor financial performance, VS is rated a HOLD based on possible technical support and potential recovery in the next few quarters. However, if the share price were to drop to RM1.00 level, the stock could become a good stock to accumulate for recovery play.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, VS.