Investment Highlights

• We raise our FY18-20F net profit forecasts by 1-3% and upgrade our FV by 15% to RM1.87 (from RM1.62), as we now peg our valuation to 15x revised CY19F FD EPS of 12.5 sen (from 13x). The earnings upgrade is to reflect changes in orders from Keurig and other key customers. We maintain BUY on V.S. Industry.

• We came away from V.S. Industry’s (VSI) 3Q analyst briefing with the following key takeaways:

1. Box-build orders to pick up moving forward: VSI has consolidated two of its assembly lines for an older model as box-build volume shrank, and is planning to phase out production of the model by endCY18. On a more positive note, mass production of a new lifestyle product for its key customer has begun in July2018 and the group has won an additional line for an existing floor care product with production expected to commence in Nov2018. VSI is bidding for one additional line from its key customer and has also managed to renegotiate terms with the key customer, which we believe should ease cost pressures and improve margins ahead.

2. Keurig’s revenue contribution to recover FY19 onwards: Recall that two Keurig models had been discontinued in February upon reaching the end of the product lifecycle. We expect earnings to improve as production of a replacement model has started in May, while three additional models are expected in FY19. Additionally, the coming quarters (4Q and 1Q) are seasonally stronger quarters for Keurig, thus we expect improved earnings contribution to VSI. We also view Keurig Green Mountain’s merger with Dr Pepper Snapple Group positively as it may boost Keurig orders in the longer term when synergies from the merger are realized.

3. Update on new factories: Its acquired 120K sq ft factory is under renovation and will house the key customer’s new line in Nov 2018 while its 180K sq ft new factory is scheduled for completion in October. Both facilities have a combined floor space of 20 lines. VSI is currently in talks to fill up the additional capacity at the new facilities.

• Key risks to the group’s performance include: (i) continued drag from its China and Indonesia segments, which contributed 20% and 5% of VSI’s revenue for FY17 respectively; and (ii) changes in regulations which may impact operating costs.

• We continue to like VSI due to: (i) its association with its key customer, which plans a slate of new product launches over the next few years; (ii) its ability to offer turnkey electronic manufacturing services (EMS) solutions being a verticallyintegrated player; and (iii) its handsome growth prospects from FY18F-FY20F, underpinned by sustainable capacity expansions and sturdy box-build orders from its key customer.

Source: AmInvest Research - 16 Jul 2018