What’s New

• Secured Bissell as a new key customer. VS Industry Berhad (VS) has signed a 3-year Master Supply Agreement with Bissell to manufacture homecare products on box-build assembly basis. Job scopes include provision of end-to-end processes from production to assembly, testing, packaging, labelling, and logistics arrangement.

• The agreement does not specify contract volumes and values. The contract sum under this agreement shall be based on purchase orders placed over the period. Nevertheless, Bissell shall on the 15th of each calendar month during the term of the Agreement, provides the Group with an provide an updated and revised rolling forecast containing volume estimates of products for the following 6 months period. Meanwhile, the agreement is on non-exclusive basis as Bissell reserves the right to engage other supplies to provide substitutes for the products.

Comment

• Who is Bissell? Bissell is a family-owned company and one of the leaders in home appliances in the USA. The company specialises in homecare products such as vacuums, sweepers, carpet-cleaning machines, hard floor cleaners, cleaning formulas, and pet grooming and clean-up products. Also, the company provides commercial cleaning equipment under the brand Sanitaire, specialising in products for industries including professional cleaning services, hospitality, healthcare and education. Over the years, Bissell is ranked one of the top-selling brands in homecare small appliances in the US.

• Capitalising on the US-China trade war. VS is Bissell’s first supplier in Southeast Asia. The Group highlighted that the opportunity arose from the on-going US-China trade war as MNCs from the US are looking to shift or diversify their manufacturing base to Southeast Asia.

• Total orders under the 3-year agreement are believed to be sizeable. The Group has ready capacity to cater for Bissell’s orders with its new additional factories. We understand that the initial orders might be small, but it is expected to grow substantially over the agreement period since there will be a dedicated plant for Bissell.

• Positive impact to FY20F earnings onwards. The new orders are expected to have positive impact to the Group’s earnings from FY20F onwards. For the time being, we think that VS is required to work on testing, customizing its plant and facility, and other necessary set-up arrangements before any full production. Furthermore, in order to attain operational efficiency and productivity, it would probably take 1 year from the initial production to achieve optimal capacity.

Earnings Outlook/Revision

• Potential earnings upside for FY20/21F. No change to our earnings estimates for FY19-20F pending management guidance on the estimated contact value. An analyst/fund manager briefing will be held on 6 March 2019 (Wednesday).

Valuation & Recommendation

• Maintain BUY on VS with a higher target price of RM1.27 (RM1.02 previously) after it has successfully secured a new key customer. We are applying higher PE multiple of 15.0x (from 13.5x) and rolling over our valuation to FY20F to better reflect the Group’s strong prospects and earnings upside.

• Still has legs. Although the share price has appreciated 39% since our upgrade of call in January this year, we believe the stock still has more upside as VS could potentially win more orders and secure new customers moving forward.

Source: JF Apex Securities Research - 4 Mar 2019