Results Highlights

• V.S. Industry Bhd’s (VSI) 4QFY17 net profit more than tripled to RM36.8 mln, from RM10.9 mln a year ago, underpinned by significantly higher sales orders from an existing key client. Revenue for the quarter also jumped 77.4% Y.o.Y to RM983.4 mln, from RM554.2 mln in the previous corresponding period.

• FY17 net profit rose 32.6% Y.o.Y to record high at RM156.3 mln vs. RM117.9 mln last year, in-tandem with a 50.8% Y.o.Y hike in revenue at RM3.28 bln, from RM2.18 bln a year ago. Subsequently, the group has declared a fourth interim dividend of one sen per share, payable on 27th October, 2017, alongside a proposed final dividend of another one sen, bringing total dividend for the year to 5.9 sen, from 4.7 sen in FY16.

• The reported earnings was within our expectations, accounting to 101.6% of our full-year estimated net profit of RM153.8 mln, while the reported revenue came in 9.1% higher than of our estimated FY17 revenue of RM3.01 bln. The difference in revenue was mainly due to stronger-than-expected revenue contribution from its Malaysia and Indonesia units.

• Moving forward, we expect VSI to boost capacity, in-tandem with increasing boxbuild orders from existing, as well as new clients. Last we checked, the group’s upcoming factory cum warehouse is currently at the piling stage and is scheduled to be completed by June 2018.

Prospects

We maintain our positive stance on VSI’s outlook moving forward as the group ramps up its production capacity, riding on higher sales orders from existing key clients as well as potential new orders (i.e.: automated hygiene-related products) which could boost margins due to the niche nature of the products.

Higher sales orders from Keurig is also envisaged to drive VSI’s sales growth in the next two years as the former starts to supply to Asian markets like Korea, which will be wellreceived, in our view.

Meanwhile, VSI’s operations in China, undertaken by its Hong Kong-listed subsidiary VS International Group Limited (VSIG) made a turnaround in its FY17 earnings recently, mainly due to stronger contribution in the assembly segment. We think that healthcarerelated products like Perfect China’s air purifier will continue to drive VSI’s revenue growth in China over the near-term, on the back of rising health awareness and lifestyle standards.

Separately, VSI is still in the midst of securing an approval for the Diamond water filter manufacturing plant in China. In the meantime, VSI is manufacturing Diamond water filters, albeit in low volumes that is exported to other NEP markets like Singapore, Hong Kong and Malaysia.

All-in-all, we think that VSI will continue to perform positively in the near-term, boasting a strong double-digit growth in earnings, as well as revenue – underpinned by growing sales orders, higher production capacity and the absence of a one-off revaluation loss in properties in FY17.

Valuation and Recommendation

We increased our FY18 earnings and revenue forecast by 15.4% and 9.5% to RM260.9 mln and RM4.36 bln respectively, premised on potentially higher revenue as VSI boost capacity to cater to additional box-build orders from an existing key client and potentially higher margins from new orders. We also introduce our FY19 earnings and revenue forecast at RM299.9 mln and RM5.2 bln respectively.

We maintain our BUY recommendation on VSI, but with a higher target price of RM2.95 (from RM2.35), derived by ascribing a higher target PER of 17.0x (from 15.5x) to its FY18 diluted EPS of 17.3 sen, due to the recent rally in the EMS industry. The ascribed target PER is higher its closest competitor SKP Resources, 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 trackrecord, 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 - 29 Sept 2017