Investment Highlights

• We downgrade our recommendation on V.S. Industry (VSI) from a BUY to a HOLD, with a 5% lower fair value of RM1.78/share (previously RM1.87) pegged to a CY19F PE of 15x, following the recent run-up in VSI’s share price.

• We have revised our FY19F-FY20F earnings forecasts downwards by 15% and 20% respectively following management’s guidance at VSI’s 4QFY18 analyst briefing to account for a more prudent assumption in box-build orders from its key customer and expectations that VSI’s China segment will continue to be loss-making.

• Key takeaways from the 4QFY18 analyst briefing are as follows:
  1. Update on box-build orders from VSI’s key customer: VSI’s lines are running at optimal capacity, including the production of the key customer’s new lifestyle product in July 2018. An additional line producing a floor care product for its key customer is expected to commence in Nov 2018. 
  2. Additional Keurig models expected in FY19: VSI is currently producing three of Keurig’s coffee makers, including new models that were added in May 2018 and Aug 2018. For FY19, VSI will produce three new models between March 2019 and June 2019, instead of two models that were guided earlier. 
  3. Update on new facilities: Its acquired 120K sq ft factory’s renovation is nearly completed and will house a key customer’s new line in Nov 2018, while its new 180K sq ft factory will be ready by end-CY18. Both factories are able to house a total of 10 lines, including machinery and auxiliary lines. 
  4. China operations to continue to be loss-making: Following the disposal of VS International Group’s subsidiary Qingdao GP Electronic Plastics in 4QFY18, the group has no major operations in Qingdao and will focus on its operations in Zhuhai moving forward. Outlook for VSI’s China segment remains challenging amid underutilization of its facilities, high material and labour costs, and intense competition, which is exacerbated by weakened business sentiment following the US-China trade war.
• Although VSI is expecting a stable growth of orders from its key customers for its Malaysian operations in FY19F-FY20F, we believe that its earnings growth has been largely priced in.
• We note that VSI is expected to face a continued drag from its China operations in FY19 and FY20, and is currently looking to fill additional capacity at its new facilities. Key upside risk to our outlook is that VSI would secure additional orders from existing as well as prospective customers for CY19.

Source: AmInvest Research - 4 Oct 2018