Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) with a fair value of RM1.87/share, pegged to a CY19F PE of 13x. We maintain our FY19F-FY20F forecasts pending guidance from an upcoming analyst briefing.

• VSI’s 4QFY18 core profit came in at RM47mil, bringing FY18 core profit to RM159mil. This is after stripping out total oneoff net losses amounting to RM9mil, which include impairment loss on properties, loss on disposal of a subsidiary in its China segment, and share of loss of its associates. Excluding these one-off items, VSI’s FY18 results are in line with our forecasts (exceeding by 2%) and above consensus estimates (exceeding by 7%).

• FY18 core profit fell 8% YoY despite VSI’s higher revenue as margins were impacted by higher material and labour costs, initial set-up and testing costs for its new assembly lines incurred in 1HFY18, and reduced contribution from Keurig due to operational efficiencies from the discontinuation of two of its models for its Malaysian operations.

• FY18 revenue soared 25% mainly due to higher contribution from its Malaysia and Indonesia segments, driven by higher sales orders from its key MNC customers offsetting the lower contribution from Keurig in Malaysia, and a change in billing for a customer from a consignment basis to turnkey manufacturing basis in Indonesia.

• For its Indonesia segment, VSI recorded an improved PBT of RM3mil in FY18 vs. LBT of RM5mil in FY17 due to the absence of a revaluation deficit of RM12mil last year, following the revaluation exercise of its properties.

• Its China segment recorded an LBT of RM19mil, mainly from loss on disposal of its subsidiary in Qingdao and as margins continue to be affected by intense competition, reducing the ability to past on higher material and labour costs.

• Moving forward, we expect earnings to be sustained by stable orders from its key customers as additional assembly lines are expected to come onstream in FY19.

• We continue to like VSI due to: (i) its association with its key customer which is planning a slate of new product launches over the next few years; (ii) its ability to offer turnkey electronic manufacturing services solutions being a vertically-integrated player; (iii) its handsome growth prospects, underpinned by sustainable capacity expansions and sturdy box-build orders from its key customer.

Source: AmInvest Research - 26 Sept 2018