Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) with unchanged forecasts and fair value of RM3.30/share. Our fair value is pegged to a CY18F PE of 15x.

• VSI's 1QFY18 core net profit came within expectations at RM44mil, representing a YoY growth of 28%, but a 10% QoQ decline. The core profit accounted for 15% of our full-year forecast and 18% of consensus estimate. An interim dividend of 1.50 sen was declared during the quarter (vs. 1.20 sen in 1QFY17), in line with the group’s practice of paying out ~40% of profit.

• The QoQ decline in earnings stemmed from higher losses from China, which is represented by the group’s 44%- owned V.S. International Group (VSIG). The losses were associated with pre-operating expenses for new products that would commence mass production in the coming quarters. Management expects VSIG to return to the black in 2QFY18.

• On a YoY basis, earnings expanded on the back of a 60% surge in revenue, mainly due to higher box-build orders from its main customer. Note that the profit grew by a lower quantum owing to setup costs of additional production lines commissioned during the quarter.

• Earnings are expected to go into full swing in 2HFY18 as the group captures contribution from all its seven assembly lines. The group is also well prepared for more contract wins with its upcoming factory that could house up to 12 additional assembly lines.

• We understand the group is currently in the midst of procuring new jobs from an American lifestyle product and a Swiss hygiene system. If awarded, the contracts could expand VSI's FY19F revenue by more than RM1bil, based on our estimate. We have not factored the potential contribution from these contracts into our earnings projections.

• We continue to like VSI due to: i) its association with Customer X, who plans a slate of new product launches over the next few years; ii) its ability to offer turnkey electronic manufacturing services (EMS) solutions being a vertically integrated player; and iii) its handsome growth prospects from FY18F-FY20F, underpinned by sustainable capacity expansions.

Source: AmInvest Research - 15 Dec 2017