Investment Highlights

• We maintain our BUY recommendation but cut our fair value to RM2.50/share (vs. RM3.00/share previously). We peg the fair value to a lower FY19F FD PE of 15x (previously 16x) given a lack of immediate catalysts for the company. Our FY18F-FY20F earnings are revised downwards by 4-11% to account for the consolidation of 2 assembly lines, which will subsequently be discontinued by end-CY18.

• We came away from VSI's analyst briefing discouraged by several events and headwinds that the company is facing. We learned that the company plans to consolidate 2 of its assembly lines into 1 as the box-build volume of an older model shrank considerably. The model is likely to be discontinued by end-CY18, removing circa RM300mil revenue contribution annually (~6% to FY19F revenue).

• The group's margin in 1HFY18 was also hit by one-off recruitment agency fees as it brought in some 2,000 workers, increasing its total workforce to about 8,000 currently. Additionally, in the wake of Malaysia's new foreign workers levy requirement effective 1 Jan 2018, the group is expected to face a slight margin squeeze as it has expressed difficulty in passing on the cost increase to its customers. We estimate the cost increase at circa RM15mil based on 8,000 workers, which translates to a 5% reduction in FY19F net profit (factored into our earnings revision).

• On a brighter note, the group expects to commence the production of 4 Keurig models, one each in May 2018, Aug 2018, Mar 2019 and Apr 2019 — making up for the discontinuation of 2 models in 2QFY18. In addition, the group is starting the production of a lifestyle product in May 2018 as well as bidding for 2 additional lines from its key customer. The additional lines are expected to be commissioned in Oct 2018 if awarded. Anchored to the new jobs, VSI is set to record strong earnings growth in FY19F.

• As part of its plan to adopt automation, VSI has recently installed 25 units of robotic equipment that facilitate the plastic injection and spraying processes. Management has indicated that one unit is expected to take over the work of 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. Eventually, the group plans to automate 30% of its manufacturing processes in Malaysia, which requires circa 800 units of similar equipment.

• Overall, while VSI's prospects are dampened by a string of headwinds, earnings growth remains sturdy at 23% 3-year forward CAGR. At the current price, VSI is trading at 12x forward PE, below its 2-year historical average of 14x. We believe the recent selldown offers opportunities for investors to accumulate and bank on VSI's long-term execution excellence.

Source: AmInvest Research - 4 Apr 2018