Investment Highlights

• We upgrade our recommendation on V.S. Industry (VSI) to BUY from HOLD following the recent fall in its share price. We lower our fair value to RM1.04/share (previously RM1.31/share) pegged to a lower CY19F PE of 14x (previously 15x) amid the anticipated order slowdown in CY19 and reduced market capitalization of VSI.

• We cut our FY19F-FY21F forecasts further by 6-15% mainly on account of lower printed circuit board assembly (PCBA) revenue tied to reduced contribution from VSI’s key customer in 2HFY19.

• Despite the expectations of declining order flow for its key customer, we understand that the group is currently in various stages of discussion with more than five prospective MNC customers to secure new orders that would fill the excess capacity in its facilities.

• Following its 36th AGM recently, VSI MD Datuk S.Y. Gan had shared that the ongoing US-China trade war had opened up opportunities for VSI through receipts of enquiries from US MNCs looking to shift or diversify their manufacturing bases to Southeast Asia. We concur that VSI is well-equipped to take on these opportunities given its new facilities with 300K sq ft combined production space i.e. its acquired 120K sq ft factory and new 180K sq ft factory.

• Furthermore, VSI continues to undergo cost rationalization exercise to streamline its operations in China in light of uncertainties from the US-China trade war, higher operating costs and intense competition faced.

• While VSI’s short-term prospects have been dampened by a string of headwinds, we recommend a buy on VSI as we believe the recent selldown offers opportunities for investors to accumulate VSI’s shares premised on its longterm prospects tied to its solid execution track record. Furthermore, VSI boasts a healthy balance sheet with its net asset per share standing at RM0.84 with net gearing of 0.2x as at 31 Oct 2018. At the current price, VSI is trading at 9x PE, way below its 2-year historical average PE of 19x. All-in, we believe VSI’s fundamentals remain intact and recommend a BUY on weakness.

Source: AmInvest Research - 9 Jan 2019