Investment Highlights

• We maintain our UNDERWEIGHT recommendation on V.S. Industry (VSI) with a higher fair value of RM1.32/share, pegged to a CY21F PE of 14x (previously RM0.80/share, pegged to a CY21F PE of 10x). Our target PE is tied to VSI’s peer market cap weighted average forward PE. Our re-rating is premised upon local EMS players being a beneficiary from the US-China trade war diversion which has not been significantly disrupted by the ongoing Covid-19 pandemic.
• VSI has signed an agreement with Victory Inc (Victory) to manufacture and supply cordless handheld and backpack electrostatic sprayers on a box-built basis i.e. end-to-end processes from production up till the logistics fulfilment stage.
  
  Earnings contribution is expected to kick in from 2HFY21 onwards although no volume and contract amounts were mentioned in the announcement. We await further details on this development from VSI’s briefing tomorrow.
   
• Victory’s background: Headquartered in Minnesota, USA, Victory is a leading sanitary solutions provider where its products have applications in sanitization, decontamination, pest control, odor control and infection prevention.
  
  Its products are distributed in the USA and more than 40 countries, and are used by hospitals, hotels, airlines, public transportation, households and various businesses. The first in the world, Victory’s cordless electrostatic sprayers are reportedly 70% faster and use 65% less chemicals, making it more efficient than a traditional sprayer (Exhibit 1).
   
• Following this announcement, we have raised our FY21F– FY22F forecasts by 14–22% to account for box-build order contribution from Victory, assuming it is of a similar contract size to Bissell’s.
• We are positive on this development as VSI said both of the sprayer products are seeing exceptional demand brought about by the Covid-19 pandemic. Our channel checks indicate that the handheld sprayer is priced at US$900–US$1,500 while the backpack sprayer is sold at around US$2,500 in the USA.
• Despite VSI’s positive prospects being intact, we deem the stock’s current valuations rich at 19x CY21 PE. VSI’s positive prospects arise from: (i) sturdy box-build order growth supported by its key customers’ product launches; (ii) its ability to offer turnkey EMS solutions as a vertically-integrated player; and (iii) its efforts to diversify its customer base with potential opportunities to be secured from the US-China trade war. Key risk: (i) worsening Covid-19 impact on consumer demand of end-products.

Source: AmInvest Research - 18 Aug 2020