Background – V.S. Industry Bhd was founded in 1982 and the group provides vertically integrated manufacturing services such as tooling, plastic injection, printed circuit boards (PCB) assembly and complete product assembly. Being the largest Electronic Manufacturing Services (EMS) provider in Malaysia and the 4th largest in ASEAN, the group’s clientele base extends all the way to Europe, Japan and USA with renowned clients like Dyson, Keurig Green Mountain, Zodiac and LG Innotek. About 69.0% of its FY16 revenue was attributed to local sales, while China and Indonesia made up the remaining 26.0% and 5.0% respectively.

Results Update – The group’s 4QFY16 net profit plunged 79.2% Y.o.Y to RM10.9 mln, from RM52.7 mln a year ago - mainly due to an impairment loss of RM21.8 mln on deposit paid for the acquisition of a 20.0% equity interest in a solar power project in China, as well as lower forex gains. Revenue, however, rose 9.3% Y.o.Y to RM554.2 mln vs. RM506.8 mln in 4QFY15. Meanwhile, V.S. Industry’s FY16 net profit fell 11.2% Y.o.Y to RM117.9 mln, from RM132.7 mln in the previous corresponding year despite a 12.3% Y.o.Y increase in revenue to RM2.18 bln, from RM1.94 bln. The weaker net profit was due to one-off impairments and much higher forex gains in FY15.

Future Plans – Expects higher contribution from Dyson on the back of rising box-built assembly orders. The group will also supply its first full Original Design Manufacturer (ODM) coffee brewer to Keurig (worth US$82.0 mln), exclusively for the first 18 months beginning January 2017. Following the acquisition of a 20.0% stake in NEP Holdings, the provider of “Diamond” filter systems, V.S. Industry has secured RM100.0 mln a year worth of orders for NEP’s China operations, as well as a profit guarantee of RM40.0 mln in FY17.

Investment Risks – Significant risks include weak consumer sentiment, which could lead to weaker demand from key clients, fluctuations in foreign currencies and higher minimum wages, resulting in increased cost.

Investment Highlights – According to Bloomberg consensus estimate, V.S. Industry is forecast to grow at a double-digit, three-year revenue and net profit CAGR of 19.7% and 16.6% to RM3.32 bln and RM210.7 mln respectively by FY18. The group’s PERs at 9.5x and 8.1x for FY17 and FY18 respectively is trading below its competitors PERs at 10.0x to 12.5x, implying potential upside, in our view. V.S. Industry maintains a minimum dividend policy payout ratio of 40.0% of net profit and has proposed a fourth interim single tier dividend of 0.8 sen per share, payable on 28th October, 2016. Net gearing has also been low for the past three years at 0.2x to 0.5x.

Source: M+ Online Research - 19 Oct 2016