V.S. Industry (VS) is currently ramping up production for Bissell, Keurig and a new PCBA customer, which is expected to mitigate the lower orders from its key customer as one of the floor-care models reached the end of the product lifecycle. In addition to increasing orders from the abovementioned customers, we reckon that the group stands a high chance in securing new customers given its strong ability to secure new orders and its proven track record. While no new customer was announced during the briefing yesterday, we understand that the group is in advanced stages of discussions with a number of prospective customers. We maintain our earnings forecasts and BUY rating on VS with an unchanged 12-month TP of RM1.60.

Ramping Up Production for Both New and Existing Customers

Following the stabilisation of production for its first model for Bissell, which is currently running at an estimated utilisation rate of 80%, VS expects the next two models to come on-stream progressively over the next two months. Besides, the group has commenced production for its new PCBA customer in August 2019, and is currently at the tooling stage for its new box-build customer. In addition, VS has received more orders from Keurig as a result of trade diversion and is currently running more than 5 models for Keurig (3 models in FY19). On a positive note, the group plans to participate in the bidding for 2H20 new projects of its key customer.

New Contract Win on the Cards?

VS’ management and business development team are currently in the US discussing potential new opportunities with 4 prospective customers which are involved in the home-appliances industry. Should new orders come to fruition, we believe it would further diversify VS’ customer mix and enable the group to regain investors’ confidence. Based on our sensitivity analysis, every RM100m new contract from a new customer could potentially increase the group’s core net profit by c.2-3% for FY20-22E.

Maintain BUY With An Unchanged TP of RM1.60

We maintain our earnings forecasts and reiterate our BUY on VS, with an unchanged TP of RM1.60 based on a target CY20E PER of 16x. We like VS for its: i) diversified customer mix, ii) strong ability in securing new contracts, which makes it a prime beneficiary of trade diversion, and iii) earnings growth on the back of new orders and lower losses from its China operations. Downside risks include: i) key customer risk; ii) reliance on foreign labour, iii) a prolonged US-China trade stand-off, and iv) global economic slowdown.

Source: Affin Hwang Research - 10 Jan 2020