VSI has signed an agreement with Victory Innovations Company Inc to manufacture and supply cordless electrostatic sprayers on a box -built basis. We are positive on this development and view this as a testament for VSI ability to secure new contracts despite the uncertain economic environment. VSI has successfully secured a contract of RM600m for CY21 and guided Victory’s contribution will be in an upward trend. Their existing customers are also showing positive growths with additional orders from Customer X, US customer as well as the coffee brewer. We raise our forecast for FY21-22 by 65-76% to RM183.8m and RM218.5m, respectively premised on higher revenue projection and improving utilisation rate. Upgrade to BUY with TP of RM1.99 pegged to PE multiple of 17x of FY22 EPS.

NEWSBREAK

VSI has on 17 August 2020, entered into an agreement with a new customer, Victory Innovations Company Inc to manufacture and supply cordless electrostatic sprayers on box-built basis.

HLIB’s VIEW

Background. Victory Inc. was founded in 2014 with HQ located in Minnesota, US. Victory is the world’s first producer for professional cordless electrostatics handled sprayer and professional cordless electrostatics backpack sprayer. They have the exclusive patented double-charged technology that allows the chemical solutions to envelop shadowed, vertical, and difficult to reach grounded surfaces. Outside US, its products are also distributed to more than 40 countries across the Europe, Asia, Oceania and Africa continents. Victory Inc.’s products are used by hospitals, hotels, schools, airlines, casinos, public transportation, household and businesses to sanitize and disinfect large areas swiftly and effectively.

Testament. We are positive on this development and view this as a testament for VSI ability to secure new contracts despite the uncertain economic environment. We understand that Victory is an unexpected customer that VSI acquired due to the overwhelming demand for this machine (discussion only started in April 2020). The scope of the work will include the production of cordless electrostatic handheld sprayer and cordless electrostatic backpack sprayer (see Figure #1). Observing the continuing spike in Covid-19 cases globally, filling up orders are in VSI’s priority list as both products are currently in short supply. Currently, Victory only has one contract manufacturer in China and VSI is their first and only supplier outside of China.

Quantum. VSI has successfully secured a contract of RM600m for CY21 and guided the contribution from Victory to be in an upward trend of RM1.4bn and RM1.5bn for CY22 and CY23, respectively.

Riding through the trade rift. Apart from reaping the benefit from Victory’s organic growth, VSI has the potential to benefit from the US-China trade war. To recap, VSI successfully signed US customer floor care product in Mar 2019, which was previously manufactured by two China based EMS. VSI have been awarded with additional 4 models (total of 9) from US customer with contribution to top line amounted to RM800m for FY21. Projection is expected to be positive and VSI could potentially secure a total of 12 models with revenue contribution to be RM1.2bn for FY22. Note that the margin contribution for the US customer is higher than the UK’s.

Customer X. Currently, VSI is running 2.5 lines for their UK -based customer; floor care (1 line) and haircare (1.5 lines). We understand that VSI is slowly phasing out the floor care product from the production line. However, this is positively impacting VSI, as it is able to use the vacated floor space and labour to start production for Victory without any major capex spending. Apart from that, we are assured with VSI proactive measure in reducing reliant to Customer X. In addition, VSI has been awarded with another RM200m contract for motorised items and additional RM200m for beauty line product, both are expected to contribute positively in FY21.

Caffeinated. VSI is also benefiting from their long existing partnership with the coffee brewer. We understand that there has been a sudden spiked in order for coffee machines on top of a strong rebound from existing high demand as customers stock up for Christmas and year-end sales. This was mainly due to the lockdown measure that has been put in place that caused most consumers to opt in buying their own coffee machines. Contributions are expected to increase to RM250-300m annually (from RM200m).

It does not stop there. We gather that VSI is still in active negotiations with the 5 prospective customers. The movement restriction that was implemented has caused a slight delay in forging new relationships. However, with the ongoing US-China trade rift and gradual border reopening, the negotiations have started to pick up where they left off. From our channel check, should another partnership materialize, VSI is looking to buy another RM400k sqft plant to support this growth as they are expected to operate in full capacity by FY21. As the biggest EMS player in Malaysia with solid track record, we opine that VSI is on trajectory to achieve new -high order value amongst the intensifying trade diversion.

Forecast. We raise our forecast for FY21-22 by 65-76% to RM183.8m and RM218.5m, respectively premised on higher revenue projection and improving utilisation rate. Upgrade to BUY. TP: RM1.99. We take this opportunity to roll forward our valuation horizon to FY22. Our TP is revised to RM1.99 (from RM0.94) reflecting the rise in earnings forecast as well as the higher PE multiple of 17x (previously 15x) of FY22 EPS. We view the premium PE multiple is justifiable taking into account of VSI’s multi year growth trajectory from existing customers coupled with the proven capability to secure more projects that yield higher margins in the near future

Source: Hong Leong Investment Bank Research - 21 Aug 2020