Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) with a higher fair value of RM3.32/share (previously RM3.30/share) after rolling forward our earnings base to FY19F from CY18F. Our fair value is pegged to a FY19F PE of 16x.

• VSI has proposed a 1-for-4 bonus issue of up to 397.6 million new shares. Assuming full conversion of outstanding share options, our target price will be rationalised to RM2.67/share after the exercise. We view the development positively as it could improve trading liquidity and the affordability of VSI shares.

• We have trimmed our earnings forecasts by 10-17% for FY18F-FY20F on account of: 1) lower-than-expected orders from Keurig and Zodiac; 2) a rescheduling of the production of a product from Oct 2017 to May 2018; and 3) a revision in our USD/MYR assumption to 3.95 from 4.30 previously, which adversely affects Keurig and Zodiac.

• Notwithstanding the temporary hiccups, VSI’s prospects remain bright. The group has recently purchased two new factories in Johor, including one existing factory and one which is currently under construction (ready by June). We understand that the new factories can house substantially more assembly lines, placing the group in a good position to bid for additional jobs in the future.

• VSI plans to replace 30% of its manufacturing processes in Malaysia with automation. For a start, the group is installing >20 units of robotic equipment that facilitate the plastic injection and spraying processes. Management has indicated that one unit is expected to save 2-3 workers, who are being paid circa RM3,000 per month. Assuming a 10% depreciate rate, we estimate that 25 units of the equipment can bring about net savings of up to RM2.5mil per year.

• We expect earnings to go into full swing in 2HFY18 as the group captures contribution from additional assembly lines that came onstream in Oct and Nov 2017. In addition, operations in China are set to return to the black in the next quarter as production of air purifiers and aircon components picks up.

• We continue to like VSI due to: 1) its association with a Key Customer, who plans a slate of new product launches over the next few years; 2) its ability to offer turnkey electronic manufacturing services (EMS) solutions being a vertically integrated player; and 3) its handsome growth prospects from FY18F-FY20F, underpinned by sustainable capacity expansions.

Source: AmInvest Research - 26 Jan 2018