Investment Highlights

• We reiterate our BUY recommendation on V.S. Industry (VSI) but cut our fair value to RM1.62/share (previously RM2.15), pegged to a lower CY19F FD PE of 13x (previously 15x). We revise our FY18F-FY20F net profit forecasts downwards by 23%, 12% and 14% respectively to account for lower-than-expected box-build orders from Keurig and its key customer. The lower PE multiple attached is to reflect a sector derating likely attributable to trade war concerns and a weak broad market sentiment.

• VSI’s 3QFY18 results came in below our expectations with a net profit of RM21mil (-64% YoY, -57% QoQ), which brings 9MFY18 core net profit to RM113mil (-8% YoY). This accounts for 72% of our full-year forecasts and 57% of consensus estimates. A third interim dividend of 0.5 sen per share was declared during the quarter, bringing YTD dividend to 3.5 sen (9MFY17: 3.9sen).

• On a QoQ basis, revenue and EBITDA declined by 21% and 46% respectively. The larger drop in EBITDA was due to margin compressions caused by set-up and testing costs associated with a new production line for the key customer. In addition, the discontinuation of 2 Keurig models in 2QFY18 has also resulted in operational inefficiencies.

• Meanwhile, the group’s China segment recorded lower revenue (-36% YoY) and PBT (-73% YoY) in 3QFY18 on the back of lower sales orders and rising material and labour costs. Intense competition has also reduced the ability to pass on cost increases.

• We expect the quarters ahead to improve due to: (i) 4 additional Keurig models expected to commence production in May 2018, Aug 2018, Mar 2019 and Apr 2019, replacing the 2 models discontinued in 2QFY18; (ii) 4Q and 1Q being seasonally stronger quarters for Keurig; (iii) mass production of a new lifestyle product for its key customer expected to begin in July 2018; and (iv) the group’s bidding for 2 additional lines from its key customer.

• Despite the recent selldown, we continue to like VSI due to: (i) the association with its key customer which is planning a slate of new product launches over the next few years; (ii) its ability to offer turnkey electronic manufacturing services (EMS) solutions being a vertically integrated player; and (iii) its handsome growth prospects from FY18F-FY20F with a 3-year CAGR of 17% and a dividend yield of 3-5%.

Source: AmInvest Research - 29 Jun 2018