Investment Highlights

• We upgrade our recommendation on V.S. Industry (VSI) to BUY from HOLD with a higher fair value of RM2.60/share, pegged to a higher FY22F PE of 18x (previously RM2.21/share, FY22F PE of 17x).

• We believe that the higher PE multiple is justified given VSI’s 3- year profit CAGR of 37%, its increasingly diversified customer base, and its potential to secure additional sizeable job wins in future.

• We raise our FY21F–FY23F forecasts by 11–16% after attending VSI’s 4QFY20 briefing to account for higher revenue forecasts for its Malaysia segment coupled with higher margin assumptions.

• Key takeaways from VSI’s briefing are as follows:
   
  • Results summary: FY20 core profit of RM130mil is 27% lower YoY due to: (i) revenue falling 19% largely due to closure of its Malaysian factories whilst still incurring operational and financial costs during the movement control order (MCO); (ii) lower sales orders from VSI’s key UK customer; and (iii) its Indonesian segment slipping into the red as a key customer filed for bankruptcy. This was despite narrower losses for China in FY20. Changes in revenue contribution by segment YoY are shown in Exhibit 1.
     
  • Updates on Malaysian customers:
     
    • Customer X: In August 2020, VSI secured new motorized printed circuit board assembly (PCBA) and box-build jobs contributing RM200mil to FY21’s top line. Production is set to begin in December 2020. Meanwhile, production of floor care products is reaching end-of-product life cycle, with the group’s personal care product line still running.
       
    • US-based customer: VSI currently produces three models, with two more slated for production by December 2020 and early 2021 respectively. On top of that, four additional models were secured and will begin production by 2HFY21. By end-FY21, VSI will be running nine models for this customer. The group may potentially secure up to a total of 12-13 models.
       
    • Victory: Production begins in 1QFY21, with tooling and molding fabrication processes currently ongoing.
       
    • Pool cleaning customer: Higher sales are expected in FY21 after seeing increase in demand post-lifting of Covid-19 containment measures, which bodes well for the group as the customer commands higher margins.
       
    • Coffee brewer customer: Sales orders in FY21 are expected to rise due to stronger demand for at-home consumption following the pandemic.
       
    • Potential customers: The group is working to secure a 400K sqft factory to house its future job wins, alongside its ongoing negotiations with five prospective customers. Based on the group’s total production space in Malaysia for the past three financial years, our back-of-the-envelope calculations suggest an additional 400K sqft would translate to approx. RM700mil to RM1bil to the group’s revenue. Assuming VSI secures a contract size similar to Victory’s with a contribution of RM600mil anticipated for CY21, FY22F earnings would rise by 14% and our fair value would increase by 37 sen to RM2.97.
       
  • Updates on overseas operations: VSI’s Indonesian segment is expected to return to the black in FY21, expecting new customer orders to be secured. Meanwhile, it will continue its asset-light strategy in China, expecting losses to narrow further in FY21.

• We came away from the briefing feeling more positive of VSI’s earnings growth trajectory and progress of its customer diversification efforts. The group’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.

Source: AmInvest Research - 2 Oct 2020