Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) with unchanged forecasts and fair value of RM2.85/share, pegged to a CY18F PE of 15x.

• VSI's 4QFY17 core net profit of RM48mil (-5% QoQ, +95% YoY) came within our expectations and consensus. This brings FY17 core net profit to RM165mil, representing an increase of 32% YoY. This is after stripping out a foreign exchange gain, a loss on disposal of PPE as well as impairment losses on property and other investments. We gather that the bulk of the impairment losses stemmed from the Indonesian segment, which was impacted by the strengthening of the USD against IDR.

• The FY17 core profit rose on the back of higher revenue (+51% YoY), mainly due to higher box-build orders from Customer X. In addition, we highlight that VSI's EBIT margin in 4QFY17 improved 3.6ppts from the preceding year's quarter as the new assembly lines geared to optimal capacity, taking its full-year EBIT margin to 7.7% vs. 7.4% in FY16.

• VSI declared a dividend of 1.0 sen in 4QFY17, bringing full year dividend to 5.9 sen (FY16: 4.7 sen). This is slightly above our expectation of 5.4 sen. For FY18F-FY20F, dividend yield is forecast at 3-4%.

• We note that the China segment slipped into slight losses this quarter as revenue declined 14% QoQ. This was because the 12-month contract awarded by Perfect China to manufacture air purifiers was fulfilled faster than expected (commenced in Oct 2016, fully completed in June 2017). Recall that the group ramped up production in 1H amid seasonally heighted air pollution.

• Separately, VSI has undertaken a revaluation exercise on its properties to improve the current relevance of its financial statements, which is consistent with the group's revaluation policy. The exercise resulted in a net revaluation surplus of RM16.9mil. Excluding impairment losses that were transferred to P/L, the revaluation surplus of RM25.6mil strengthened VSI's book value (attributable to shareholders) by circa 2 sen per share to RM0.88.

• Moving forward, we believe VSI will continue to register strong earnings momentum as additional lines come onstream in Oct-Nov 2017. The group is currently working on procuring new jobs for an American lifestyle product and a Swiss hygiene system. If awarded, we estimate that the contracts could add over RM1bil to VSI's FY19F revenue. However, we have not factored any contribution from these contracts into our earnings projections.

• 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 - 28 Sept 2017