Highlights

• V.S. Industry Bhd (VSI) has inked a three-year master supply agreement with Bissell International Trading Company B.V. to manufacture certain homecare products on a box-build basis. The contract also comes with an option to extend the deal in one year increments after the initial term.

• Bissell is a well-known family-owned homecare solutions provider based in Michigan, U.S., which was established in 1876. Ranked as one of the leading brands in the homecare small appliances category, its homecare product portfolio include vacuums, sweepers, carpet-cleaning machines, steam and hard floor cleaners, pet cleaning products as well as cleaning formulas. Bissell’s products are also sold in various countries including North and South America, Europe, Middle East, Taiwan, Japan and China. Its manufacturing facilities, meanwhile, are located in Mexico and China.

• As the first turnkey EMS supplier to Bissell in Southeast Asia, VSI is responsible for the manufacturing, assembly, packaging, labelling and testing of the products before it is exported to the latter in the U.S.

• Although there is no fixed contract value, Bissell is expected to provide a rolling forecast containing the volume estimates (for about six-to-twelve months’ forward) to VSI. Subsequently, the actual contract sum will be determined based on a per order basis.

Prospects

As promised, the group has announced the entry of a new customer in the form of Bissell – a well-known homecare products manufacturer in the U.S. At the current juncture, turnover from Bissell is forecast at RM150.0 mln and RM700.0 mln in 2019 and 2020 respectively. The increased revenue is expected to cushion the lower revenue contribution from an existing customer amid weaker demand for selected home cleaning devices. Going forward, we are positive that VSI will receive more orders from Bissell to eventually reach RM1.0 bln in orders by 2021. Bottomline margins could also see improvements due to VSI‘s flexibility of as a turnkey supplier in sourcing more competitively-priced raw materials.

Over the near-term, however, we expect a weaker FY19, dragged down by high restructuring costs as the group restructures its business amid the significant slowdown in China and loss of orders from key customers.

VSIG (VSI’s China subsidiary) has issued a profit warning of a preliminary net loss up to RMB25.0 mln in 1HFY19 (vs. net profit RMB5.0 mln in 1HFY18). The solemn performance were mainly attributed to the significant drop in orders by about RMB160.0 mln and the deconsolidation of results from a disposed subsidiary in China, in-tandem with the disposal of the latter in December 2017.

However, not all is gloomy for the group as we foresee a gradual recovery from FY20 onwards, on the back of higher orders from existing and new customers looking to diversify their operations away from China due to inflated cost.

Valuation and Recommendation

We left our FY19 and FY20 forecast largely unchanged after taking into account weaker performance from China and increased orders from new (i.e.: Bissell) and existing customers to arrive at a net profit of RM135.9 mln (-2.0%) and RM161.7 mln (-0.4%) respectively, while revenue is expected to be at RM3.88 bln (+5.8%) and RM3.85 bln (- 2.5%) in FY19 and FY20 respectively.

We reiterate our BUY call for VSI with an unchanged target price of RM1.20 by ascribing to a unchanged target PER of 16.0x to its revised FY19 EPS of 7.5 sen, as we remain sanguine on VSI’s long-term growth outlook, despite the minor stumble last year due to the unexpected loss of orders from a key assembly customer as its products reached its product cycle maturity.

The target PER remains at a premium to its closest competitor, SKP Resources Bhd, mainly on the group’s leading position in Malaysia’s EMS industry that is strengthened by its wide array of supply chain services and solid earnings track-record.

Source: Mplus Research - 7 Mar 2019