Investment Highlights

• We maintain HOLD recommendation on V.S. Industry (VSI) with a higher fair value (FV) of RM0.90/share, based on a rolled-forward CY24F EPS (from CY23F previously) with an unchanged target PE of 15x (Exhibit 1), in line with the company’s 5-year historical average. We made no adjustment to our neutral 3- star ESG rating.

• Yesterday, the group announced the filing of an originating summons against Lim Chang Huat (LCH), Lim Chee Kon (LCK), Chow Chun Pooi@Chow Chan Leong (CCP) and NEP Holdings (NEP) in Kuala Lumpur High Court on 25 Jul 2023.

• NEP is a Malaysia-based company principally involved in assembling, wholesaling and trading of water filtration systems (under Diamond brand) and healthcare-related products and investment holding.

• To recap, VSI entered into a subscription agreement with NEP and LCH to subscribe for up to 20% of NEP’s shares for total cash consideration of up to RM60mil in Jul 2016.

• NEP breached several clauses in the shareholders’ agreement and articles of association over the years, such as: (a) Not holding any board of directors’ meetings for more than 2 years since May 2021, despite numerous requests from VSI, (b) Not holding annual general meetings for FY21 and FY22, (c) Not providing audited financial statements for FY21 and FY22 to VSI, and (d) Not paying dividends in FY20 which registered a PAT of RM20mil despite an agreed dividend policy of 50%.

• The purpose of this lawsuit is to allow VSI to seek: (a) A winding up order for NEP, and (b) An order for the appointment of DC Restructuring Solutions to be the joint and several liquidators of NEP.

• We believe that the slight carrying value of NEP amounting to RM7mil (3% of FY23F core net profit) in 31 Jul 2022 could be impaired. As any potential impairment of NEP’s minor equity value will be a one-off exceptional item, we do not expect any significant impact to FY23F-FY25F core earnings. Nevertheless, we do not exclude the possibility of NEP’s counter-claim against VSI. For now, we maintain our forecasts.

• With the stock trading at FY24F PE of 17.5x, 17% above its 5- year average of 15x, we see limited upside potential.

Source: AmInvest Research - 27 Jul 2023