- Solid earnings on the way. We came away from meeting with management with our POSITIVE view reaffirmed, premised on the group’s resilient earnings outlook which will be mainly driven by the production ramp-up for its new coffee brewing machine (the 3rd model for their client’s world-renowned coffee brewing system). Recall that previously, we had noted in our OR piece back dated 20th May 2014 (titled ‘Sizeable Earnings Recovery in the Making”) that its expansionary move could give a leg up to its earnings growth going forward. Notably, our conservative forecast for this production line for the new coffee brewing machine at +25% YoY growth is a conservative estimate below the management guidance of +40%. Coupled with its ongoing resilient orders of finished products ranging from vacuum cleaners, remote controllers, PCBA & plastic casings for other appliances and equipments, we derived our FY14E revenue, which implies a growth of 43% (inclusive of VSIG contribution) and could reap a NP of RM34.3m. Meanwhile for FY15E, we are expecting NP to register RM47.2m, with a conservative NP margin assumption of 2.6% (+0.5ppts) which will be underpinned by higher economies of scale as well as the group’s strategic cost-plus model for its expenses.

- Decent 3Q14 results. Despite 3Q being a seasonally weaker quarter, VSI managed to reap 3Q14 NP of RM3.8m (+2% QoQ, >+100% YoY), bringing its 9M14 NP to RM17.1m (+221% YoY). The robust growth was mainly driven by improved sales mix from the Malaysia segment. Taking a closer look at key earnings contributor; the Malaysian segment’s YTD PBT grew by 78%, mainly driven by higher sales to key customers as well as the success of its diversification into high-margin customer base.

- 4Q14 earnings could improve by leaps and bounds. Note that although the group’s YTD 9M14 earnings only made up 50% and 57% of our forecast and the consensus estimates, we believe 4Q14 could see strong earnings underpinned by strong new orders emanating from the abovementioned coffee brewing system maker as well as better margins on higher economies of scale.

- Minimum 40% dividend payout policy to give a decent net yield of c.5% potentially. 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 record 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 c.5% net dividend yield.

- Reiterate our Trading Buy rating with a higher TP of RM2.61 (from RM2.05). We believe a valuation re-rating is warranted given its crystallising sizeable earnings as well as the commitment of dividend payout policy which could yield 5% net. We are reiterating our TB rating with a higher TP of RM2.61 based on a higher targeted 10.0x FY15E PER (from 7.8x) which implies 15% discount from the closest valuation of its peer, SKP Resources (trading at 11.8x FY15 PER) and 21% discount to current FBMSC Fwd. P/E valuation of 12.6x. Coupled with the net dividend yield assumption of c.5%, V.S. Industry could potentially reward shareholders with a decent total upside of c.25%. Looking at the current share price, its valuation is still cheap, trading at an undemanding FY15E PER valuation of 8.3x, at a 30% discount to its closest peer.

Source: Kenanga