- 2Q14 results beat expectations. VSI reported 2Q14 NP of RM3.8m (-61% QoQ, >+100% YoY), bringing its 1H14 NP to RM13.3m (+73% YoY) which is marginally higher than the consensus FY14 NP forecast by 2%. The robust growth was mainly driven by improved sales mix from the Malaysia segment. Taking a closer look at this key earnings contributor, the Malaysian segment, its PBT grew by 39%, mainly driven by higher sales to key customers as well as the success of its diversification into high-margin customer base.

- Updates in V.S. International Group Limited (VSIG). It is noteworthy that since the consolidation of V.S. International Group Limited and its subsidiaries, the group’s cost rationalisation has started to bear fruits with narrower losses being seen at the YTD PBT level of its China segment. Meanwhile, regarding its industrial land in Zhuhai which could be disposed for a handsome amount, we gather that it is still at the negotiation stage which will only be realised in the medium-term (2 years).

- Sizeable earnings to crystallise from 4Q14 onwards. We gather that the group has allocated an additional capex of RM20m for its plastic injection machines for new coffee machine models and new assembly lines in FY14. The expansionary move is to cater for higher orders in tandem with new models introduction from their world-renowned coffee brewing system maker client. This, we reckoned, could potentially double the orders that the group received compared to a year ago. Coupled with its ongoing resilient orders of finished products ranging

from vacuum cleaners, remote controllers, PCBA & plastic casings for other appliances and equipments, we expect its FY14 revenue to register a robust growth of 43% (inclusive of VSIG contribution) which could reap in NP of RM34.3m. Meanwhile for FY15, we are expecting orders from the abovementioned coffee brewing system maker to beef up in tandem with the old models replacement. All in, we are expecting its NP to register RM47.2m, with a higher NP margin assumption of 2.6% (+0.5ppts) which will be underpinned by higher economies of scales as well as the group’s strategic cost-plus model for its expenses.

- Minimum 40% dividend payout policy to reward investors with net yields of 6.5%. Despite the higher net gearing of 0.6x (from 0.4x in FY13, as a result of the VSIG acquisition to turn it into a subsidiary from associate), we believe the group could maintain the underlying dividend payout track records of at least 40%, judging from the historical payout trend. If we were to err on the conservative side by taking a 40% DPR from our FY15E EPS estimate of 26.1 sen (note that VSI declared DPS of 5.0 sen for FY13, which was 43% of DPR on an adjusted EPS basis); this would imply a 10.4 sen DPS, translating into a 6.5% net dividend yield.

- Trading Buy with a higher TP of RM2.05 (from RM1.95), based on an unchanged targeted 7.8x FY15 PER (being the group’s 3-year average forward PER) as we roll forward our valuation base year from FY14 to FY15. Coupled with the net dividend yield assumption of 6.5%, the stock could potentially reward shareholders with a decent total upside of c.34%.

- Meanwhile, based on the current RM1.61 share price, the stock is trading at an undemanding FY15 PER valuation of 6.2x which is at a 37% discount to its closest peers.

Source: Kenanga