Investment Highlights

• We reiterate BUY on V.S. Industry (VSI) and raise our bonus-adjusted fair value from RM2.00/share to RM2.15/share. Our fair value is pegged to 15x CY19F FD EPS of 14.3 sen (rolled forward from FY19F). Our forecasts are unchanged.

• VSI share price, besieged by several negative events recently, has fallen over 20% from the peak. Recall that the commissioning of an assembly line for a lifestyle product was delayed from Nov 2017 to May 2018. Not helping either were the introduction of foreign workers levy and the earlier-than-expected discontinuation of 2 Keurig models. However, we believe these are merely temporary hiccups.

• Despite recent headwinds, VSI is set to record sturdy earnings growth of 23% in FY19, underpinned by:

1) Production of 4 new Keurig models. VSI is expected to commence the production of 4 Keurig models, one each in May 2018, Aug 2018, Mar 2019 and Apr 2019. These would make up for the discontinuation of 2 models in 2QFY18.

2) Production of a lifestyle product and bid for two additional lines. The group plans to start the production of a lifestyle product in May 2018 and bid for two additional lines from its key customer. If awarded, the additional lines are expected to be commissioned in Oct 2018.

3) Adopting automation in manufacturing processes. 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.

• All-in, we believe the recent selldown offers opportunities for investors to bank on VSI’s continued positive trajectory. 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 - 28 May 2018