Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) with a lower fair value of RM3.00/share (previously RM3.32/share). Our fair value is pegged to a FY19F PE of 16x. We have trimmed our FY18F-FY20F earnings by 9- 14% due to an unexpected discontinuation of 2 Keurig models.

• VSI's 2QFY18 core net profit came below expectations at RM38mil, representing a YoY growth of 21%, but a 13% QoQ decline. This brings 1HFY18 core net profit to RM81mil (+25% YoY), accounting for 33% of our full-year forecast and 35% 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.

• We believe the QoQ decline in earnings stemmed from the discontinuation of 2 Keurig models a few months ago and initial operational inefficiencies for assembly lines that commissioned in Oct-Nov 2017. In addition, 2Q and 3Q are traditionally low seasons for Keurig. Earnings are expected to pick up in 2HFY18 as utilisation of the new assembly lines improves.

• On a YoY basis, the quarterly earnings expanded on the back of a 46% surge in revenue, mainly due to higher box-build orders from its main customer. In addition, the China segment turned into the black from the previous quarter and its 2QFY18 earnings grew 15% YoY on higher air purifiers and air-con components.

• Moving forward, VSI plans to automate 30% of its manufacturing processes in Malaysia. 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% depreciation rate, we estimate that 25 units of the equipment can bring about net savings of up to RM2.5mil per year.

• 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 - 29 Mar 2018