Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with an unchanged fair value of RM1.16/share pegged to an FY20F PE of 14x. We raise our FY19F earnings forecast by 7% after attending VSI’s 3QFY19 briefing, where the group shed some light on sales order expectations for its key customers, particularly for its Malaysian operations. We also note that the 4Q is a seasonally stronger quarter for Keurig.

• The key takeaways from the briefing are as follows:

1. 9MFY19 results highlights: Revenue declined 4% YoY on weaker sales from Indonesia and China although the fall was mitigated by higher Malaysian sales. Meanwhile, PBT deteriorated by 9% YoY amid declining sales due to the absence of a large order and the underutilization of facilities in China. Also, Indonesia’s 2QFY19 and 3QFY19 PBT were unable to offset its 1QFY19 LBT attributed to lower sales and the weaker Indonesian rupiah.

2. Malaysian operations continue to show positive performance: Revenue grew 7% YoY where the decline in box-build orders for its key customer’s floorcare products was not as severe as anticipated. Revenue was further supported by increased sales of the customer’s beauty product. PBT soared 20% YoY compared with the lower base of 9MFY18 which was affected by start-up costs associated with new lines, as all of said key customer’s production lines were reported to be running optimally in 9MFY19.

3. On track to mass produce Bissell’s first model of carpet cleaner: The tooling and moulding fabrication processes have been completed and VSI is currently conducting tests and trial runs on its Bissell assembly line. Mass production of its first carpet cleaner model is targeted for Sept 2019, with an additional four models in the pipeline for Bissell.

4. Bleak outlook for overseas operations: VSI’s Indonesian segment is expected to remain profitable in FY19 while its China operations is expected to remain challenging, with the group continuously seeking to boost revenues and utilization rates for both operations. In China, restructuring efforts and downsizing are ongoing amid weak sentiments due to the USChina trade war.

5. PCBA concerns in FY20F partially mitigated: As some of VSI’s PCBA customers head towards self-sufficiency i.e. gradually producing their own PCBA through vertical integration efforts, the group has managed to secure PCBA orders from a new customer, contributing an additional RM200mil revenue in FY20F.

6. Continues to pursue opportunities from the US-China trade war: VSI is in active discussion with prospective customers after receiving enquiries from companies seeking to move or diversify their manufacturing bases from China to Malaysia and Indonesia. The group has ready production space in its new 180K sqft factory to accommodate new customers.

• We reiterate our HOLD recommendation on VSI as we opine that its prospects from expectations of steady box-build orders growth FY20F onwards from key customers in its Malaysian segment and the challenging outlook for its overseas operations have been largely factored in at the current share price.

Source: AmInvest Research - 3 Jul 2019