Wednesday, September 30, 2015

VS: Profits bummed up by forex gain

Result Update

For QE31/7/2015, VS's net profit increased by 99% q-o-q or 45% y-o-y to RM53 million while revenue was mixed; rose 21% q-o-q or declined 5% y-o-y to RM507 million. VS's PBT rose q-o-q due to forex gain of RM24.4 million which was partially offset by inventory write-down of RM7.7 million, impairment loss for PPE & trade receivables totaling RM3.0 million & loss on disposal of PPE of RM1.0 million.

Table 2: VS's last 8 quarterly results

Chart 1: VS's last 42 quarterly results

In the past 2 years, VS's net profit has benefited from exceptional gains, such as forex gains (in QE31/7/2015 & QE31/4/2015), tax credit (in QE31/10/2014 & QE31/7/2014) & gain on purchase of a 17.18%-interest in VS International Group Ltd (in QE31/7/2013). If we leave out the exceptional gains, then we can see that the operating performance of VS has been on a steady rise.

Chart 2: VS's last 42Qs NP (as reported & adjusted for exceptional gains)   


VS (closed at RM1.47 yesterday) is trading at a trailing PE of 11.5 times (based on last 4 quarters' EPS of 12.8 sen). At this PER, VS (a cyclical stock) is deemed fairly valued.

(Note: VS had a share split of 1-to-5 in September.)

Technical Outlook

Since late 2013, VS has been on a scorching run-up from 25 sen to RM1.50 recently. In the process, VS touched the line connecting the peaks of 2000 & 2007. Naturally, this would present some kind of resistance to the stock. Will it cap the rise for now? We will have to wait & see.

Chart 3: VS's monthly chart as at SEpt 29, 2015 (Source:


Based on satisfactory financial performance andfair valuation, VS is a good stock for long-term investment. However, I would advise caution as the stock could be trading at peak earning.

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.


Akagi Shigeru said...

Alex :
I will rate VS as a sell for the build up of its debt and the huge receivables. The accounting profit will be meaningless without a meaningful free cash flow. Once, it is running out of cash, I am expecting another round of right issue. After all it has been doing that for years. Huge increase of receivables and huge decrease of payable will be a huge question mark for me. it is a counter to avoid for me.

Alex Lu said...

Hi Akagi Shigeru

VS's financial position improved as at 31/7/2015 compared to 31/7/2014. Its current ratio from 1.17x to 1.45x while gearing ratio (T. liabilities to T. Equity) improved from 1.42x to 0.89x.

Debtors' collection period & inventory holding period dropped marginally from 95 & 64 days, respectively to 94 & 60 days, respectively. Creditors' settlement period also dropped from 105 to 87 days.

You are quite correct in highlighting about the proceed of the huge Rights Issue (of RM118 mil) in helping the financial position of the company. That's not the only thing that had contributed to better financial position. VS's cash flow was also boosted by Funds from Non-controlling Interest of RM76 mil.

These proceeds helped to finance new acquisition of PPE of RM64 mil, reduction of bank borrowings of RM55 mil, payment of dividend of RM45 mil and increase in bank balances of RM30 mil.

In addition, it is worth noting that the Operating Cash Flow before Changes in Working Capital was very strong (RM245 mil). This enabled the company to reduce the Trade & Other Payable & increase the Trade & Other Receivable by RM100 mil each.

Overall, I am not too worried about VS's financial position.

Akagi Shigeru said...

Hi Alex :
Thanks for the explanation. However I still have some doubts. The reduced current ratio and gearing ratio is partly because of the right issue. The built up of the huge receivables over the years (500 mil) is just too hard for me to understand. It is not the 1st time VS called for right issue. Unless it's free cash flow improve significantly in the coming quarters, otherwise I am anticipating another round of right issue. As for the dividend, that is totally inappropriate ( for me ) to raise the money from the right issue and then gives ii back as dividend. Something doesnt seems right to be. I hope I am wrong about this. I appreciate your reply. Thank you.

Alex Lu said...

Hi Akagi Shigeru

I agree with you about the peculiar generous dividend payout in the same year when you need to do a Rights Issue. Nevertheless investors like a stock that pays dividend. The more you pay, the more they will stay with you. It is all part & parcel of capital management which itself is part of financial engineering.

In America, companies are borrowing heavily to buyback their own shares. Because of the low interest rate, this exercise is actually earnings accretive. The companies would continue to do so until the market feels jittery about their leverage. Unfortunately this changeover from gung-ho to cautious capital management could well coincide with risk-on, risk-off environment. Thus we see the sharp seesaw in share prices for Glencore. Indeed, it is a strange world we live in today.

Good luck to your investment.

XxxxxXxxxxX said...


I wouldn't say that their earnings is peaked right now due to the exchange rate rose steeply during the period July 2015 up to now. I believe we cant at least see another round of boost from forex gain barring any huge global financial crisis.

lai said...

The student of todays finance will be better of being a master in behavioural psychology than calculating income statement.