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.

• We believe the selldown of VSI shares over the past few days has created buying opportunities for investors. In our opinion, the knee-jerk reaction was likely caused by a misconception about the impact of a depreciating USD on VSI's earnings.

• Recall that in 4QFY17, VSI's key customer introduced a cost pass-through mechanism that was meant to eliminate the effects of currency movements. This followed Bank Negara's ruling that mandated all domestic trades among residents be made in ringgit. Subsequently, all transactions between VSI and the key customer have been conducted in ringgit as opposed to USD previously.

• In a nutshell, unlike many exporting companies, USD movements have marginal impact on VSI's earnings. However, we take note that circa 20% of VSI's sales are still denominated in USD. Factoring the effect of some natural hedge, our sensitivity analysis suggests that every 2% appreciation/depreciation in USD would improve/reduce earnings by 1%.

• From our checks with management, operations of VSI remain on track. Operations in China are expected to return to the black in the next quarter, and box-build orders have started picking up as additional assembly lines came onstream in October and November 2017. Therefore, we expect earnings to go into full swing in 2HFY18 as the group captures contribution from the new lines.

• VSI is also well prepared for more contract wins with its upcoming factory that could house up to 12 additional assembly lines. The group is currently in talks with an American lifestyle product company to secure new jobs. If awarded, we estimate that the contract(s) would expand VSI's revenue by RM1–1.5bil, and lift the company's fair value to >RM4.00/share. Note that the potential contribution from these contracts have not been factored into our earnings projections.

• All-in, we believe fundamentals of the company remain intact, and sturdy earnings growth lie ahead. BUY on weakness.

Source: AmInvest Research - 17 Jan 2018