Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) with a higher fair value of RM2.85/share (previously RM2.30/share) after raising our net profit forecasts for FY18F FY19F by 9-19% and rolling forward our earnings base to CY18F. We have also attached a higher PE multiple of 15x (14x previously) to capture potential jobs to be awarded in FY19F.

• We came away from VSI's company visit at Johor feeling upbeat due to the company's impressive prospects in FY18F and FY19F. We gathered that additional lines were installed in mid-July and are fully operational. In addition, management guided that more lines are coming onstream in Oct-Nov 2017, thus our earnings upgrade.

• VSI is currently working on procuring new jobs for an American lifestyle product and a Swiss hygiene system for FY19F. Together, the contracts could be worth more than 30% of VSI's FY19F revenue. However, we do not factor in earnings contribution from these until the awards come through.

• On another positive note, management hints that the acquisition of NEP Holdings (NEP) by Ozner Water International Holding may not materialise. This is because there was a clause in VSI's initial purchase of NEP which mandates the future buyer to allow VSI to tag along an acquisition deal, if any. Management believes the acquirer may have lost interest due to this clause.

• For the upcoming 4QFY17 results, we maintain the view that earnings could be softer QoQ due to:
  1. Delays in the execution of its production lines, which were initially set to commence in May. However, due to delays in the moulds’ delivery, the lines were only operational in mid-July. As such, meaningful earnings contribution from the additional capacity should only kick in the next financial year;
  2. Bank Negara has ruled that all domestic trade among residents shall only be made in ringgit. Management said that the effect was felt since May 2017, from which time settlements of its battery packs and printed circuit board assembly (PCBA) were made in ringgit (previously USD), while the purchase of raw materials remained in USD. As the USD weakened over the past few months, we expect gross margins from such goods/services to contract in 4QFY17F. Moving forward, management said the pricing of VSI's battery packs and PCBA services will take the USD impact into account. Therefore, we believe the negative impact from the ruling is transitory.
• We like VSI because: i) of its association with Customer X which enjoys robust growth prospects due to its product innovation; ii) it is a home-grown world-class electronic manufacturing services (EMS) player; and iii) its strong profit growth in FY17F-FY19F underpinned by capacity expansion.

Source: AmInvest Research - 14 Sept 2017