Investment Highlights

• We maintain BUY on V.S. Industry (VSI) with a relatively unchanged fair value of RM1.50/share (previously RM1.48/share), pegged to a FY21F PE of 14x.

• We have trimmed our FY20F forecasts by 3% for FY20F but raised our FY21F and FY22F forecasts by 1% and 5% respectively due to lower-than-previously guided order forecasts for Bissell in FY20 but with higher GPM assumptions overall.

• We attended VSI’s 1QFY20 results briefing with the following key takeaways:
• 1. 1QFY20 saw weaker contribution from China but losses narrowed: VSI’s 1QFY20 core profit came in at RM50mil (-3% YoY) amid a 5% contraction in revenue mainly due to lower contribution from its China segment. China’s revenue plunged 35% YoY but LBT narrowed by RM17mil in 1QFY20 as its streamlining efforts resulted in lower operating expenses, and due to an absence of loss on disposal of subsidiary of RM5mil seen in 1QFY19. Meanwhile, the group’s domestic operations remained resilient, contributing 86% of group revenue.
• 2. Two more Bissell models to start production soon in January 2020 and another in March 2020. Meanwhile, production utilization rate for the first Bissell model which started in September 2019 is seeing a gradual ramp-up. The group has a total of 5 Bissell models confirmed, while its current 160K sqft plant allocated for the customer is able to accommodate the production of 9 models.
• 3. Positive progress seen for its new PCBA customer: VSI’s new PCBA customer contributing RM200mil p.a. saw production commencing in August 2019 and has been progressing well since. Meanwhile, its new full-assembly customer contributing RM100mil revenue p.a. is currently at the tooling stage.
• 4. Negotiations with 4–5 prospective customers are still underway, with the group ensuring that any new customers taken on would be on a permanent basis. We have not factored in any forecasts for potential customers.
• 5. Indonesia segment to remain profitable in FY20 but its China segment is still expected to contribute losses:VSI aims to increase sales and improve utilization rates for its Indonesia segment and continue to minimize losses for its China segment as the operating environment is still expected to stay challenging.
• We reiterate our BUY on VSI amid: (i) the resilience of its domestic sales due to its association with Bissell and its key customer with new product launches slated over the next few years; (ii) its ability to offer turnkey EMS solutions by being a vertically-integrated player; and (iii) its increasingly diversified customer base with potential opportunities to be secured from the US-China trade war.

Source: AmInvest Research - 10 Jan 2020