• V.S. Industry Bhd‘s (VSI) 3QFY17 net profit surged 161.6% to RM50.5 mln, from RM19.3 mln in the previous corresponding period, due to higher sales orders from its key clients. Accordingly, revenue for the quarter grew 68.2% Y.o.Y to RM854.1 mln, from RM507.8 mln in 3QFY16. The group has also declared a dividend of 1.5 sen per share, payable on 28th July 2017.

• Cumulative 9MFY17 net profit was 11.7% higher to RM119.5 mln, compared to RM107.0 mln a year ago, mainly attributed to stronger revenue, which rose 41.7% to RM2.3 bln, from RM1.62 bln in the same period last year IPO – Dolphin International Berhad
   
• VSI’s reported earnings was higher than our expectations, accounting to 84.4% of our previous full-year estimated net profit of RM141.6 mln, although the reported revenue were broadly in-line, accounting to 76.4% of our estimated FY17 revenue of RM3.01 bln. The improved earnings were mainly due to stronger margins, where its EBITDA margin rose to 11.3%, higher than the 8.7% reported in 3QFY16.
   
• Following the positive quarterly results from VSI, we maintain an upbeat view on VSI’s growth outlook, spurred by significant improvements across all of its segments, namely; Malaysia, China and Indonesia. Moving forward, the group’s earnings and revenue is envisaged to expand at a three-year CAGR of 19.7% and 14.2% respectively.

Prospects

Segmentally, we expect to see strong double-digit growth from the Malaysian unit’s contribution to the group’s earnings – driven by higher sales orders as the group ramps up the production capacity for box-built and slightly better margins, on the back of greater economies of scale. Over at China, we believe that VSI will continue to ride on the growth momentum of its partner – Diamond water filter manufacturer, NEP Holdings as the latter expand its footprint in Asia. At the same time, we also expect to see increased orders for air purifiers from Perfect China, in addition to a potential recurring income stream from the sale of air purifier replacement filters. Together with the projected growth of about 20.0%-25.0% per year from VSI’s Indonesian segment from FY18 onwards, we think that the group will be kept busy with higher sales orders from its key clients, moving forward. The group’s vertical integrated (VI) status will also further seal its position as a top-notch EMS player and help secure more contracts for new products or models rolled out by its clients in the future. Lastly, we also envisaged better margins for VSI, mainly due to greater operational efficiency as the group increases the use of automation and continuous cost management by the group.

Valuation and Recommendation

As the reported earnings were above our estimates, we increased our FY17 and FY18 earnings forecast by 8.6% and 5.4% to RM153.8 mln and RM226.0 mln respectively, on the back of higher sales contribution from key clients, coupled with improving margins. We also maintain our BUY recommendation on VSI, but with a higher target price of RM2.35 (from RM2.20) by ascribing an unchanged PER of 15.5x to its revised FY18 diluted EPS of 15.2 sen. The ascribed target PER is about a 19.0% premium to industry average of around 13.0x, which we believe is justified in view of the group’s leading position in Malaysia’s EMS industry. The premium is also accorded for its wide array of supply chain services and established earnings track-record, as well as the potentially strong forward earnings growth on offer. Risks to our recommendations include: i) slower economic growth in the local and global environment that could dampen demand for consumer electronics, which would in turn lead to lower orders, ii) labour shortages which could significantly disrupt the group’s operations due to its labour intensive structure, and iii) higher raw materials prices, as well as fluctuations in foreign exchange rate.  

Source: Mplus Research - 14 Jun 2017