Investment Highlights

• We maintain our BUY recommendation, forecasts and fair value (FV) of RM1.98/share for V.S. Industry (VSI), based on 20x FY23F revised earnings, in line with its historical 1-year average PE. There is no adjustment to our FV based on a 3- star ESG rating as appraised by us (Exhibit 3).

• We came away feeling positive on the group’s prospects from VSI’s analyst briefing yesterday. The key takeaways from the briefing are:
  • The company guided that the its Malaysian operation is currently running at full capacity since the second half of September 2021 with its entire workforce fully vaccinated now from 60% of capacity in late May this year due to movement restrictions to curb the resurgence of Covid-19 cases locally.
    This supported its stronger revenue and lower cost trajectories with better productivity and efficiency moving forward, coupled with a healthy order book pipeline.
  • For FY22F, the company expects orders from Customer X, a coffee brewer, to remain healthy and sustainable moving forward. While battery pack production is anticipated to decline moving forward, this will be offset by increased printed circuit board assembly as well as final assembly production.
    Likewise, earnings growth is expected to be driven largely by a US-based customer (which has 7 models in production currently with 1 more coming onstream in October 2021), a pool cleaning customer, as well as Customer Y (which has been producing a new model since August 2021).
  • As for its overseas operations, VSI is expecting continued improvements from its Indonesian operations, underpinned by higher sales orders from a key customer in consumer electronics, which helps to improve production utilisation and economies of scale.
    Meanwhile, the group also anticipates narrowing losses from its China-based operations, as the company continues to embark on an asset light model and cost rationalisation initiatives. VSI is in discussions to secure a potential customer for its China operations, which may provide further upside to its FY22F earnings.
    To recap, VSI is expanding its built-up area in Malaysia by 25% or 414K sq ft via an acquisition and development of land costing RM99mil at i-Park @ Senai Airport City, Johor. Part of the new manufacturing facilities have already been completed and commenced operations, while the remaining area is expected to be completed soon. The company is expecting to incur capex of RM60–100mil in FY22F as it continues to ramp up its production facilities to support this business expansion.
• All in, we continue to remain positive on VSI’s medium to long-term outlook, underpinned by its: (i) strong order growth supported by key customers’ product launches; (ii) ability to offer turnkey electronic manufacturing services solutions as a vertically integrated player; (iii) customer diversification efforts with opportunities arising from the US China trade war diversion; and (iv) improving overseas operations underpinned by higher sales order from the group’s key Indonesian customer as well as effective costs rationalisation initiatives in China.

Source: AmInvest Research - 29 Sept 2021