FY14 results above expectations. V.S. Industry (VSI) reported a 4Q14 normalised Net Profit (NP) of RM18.5m (>+100% QoQ and YoY), bringing its FY14 normalised NP to RM35.6m (+75% YoY). Note that the 4Q14 normalised NP has been adjusted by excluding tax gains of RM18m mainly related to the enhanced export incentives. Even so, the results still came in above by 5% and 13% of our full-year forecast and the consensus, respectively. The key positive deviations were due to the: (i) higher-than-expected revenue which we believe to be driven by new coffee brewing machines in 4Q14 and (ii) higher-than-expected EBIT margin on the back of favourable product mix and higher operation efficiency. Taking a closer look at its FY14 results, EBIT soared by 88% to RM58.0m (compared to the adjusted EBIT of RM30.8m in FY13) due to much higher growth at the top line (+47%) and higher EBIT margin of 3.4% (+0.7ppts).

Generous dividend payout which was above expectations. We were also pleasantly surprised by the generous DPS payout of 11.7 sen (vs. our estimate and the consensus forecast of 7.6 sen and 6.3 sen, respectively). To note, the group has declared a third interim single-tier dividend of 3.5 sen per share and proposed a final single tier dividend of 3.5 sen, totaling to 7.0 net DPS in the quarter under review. Coupled with the single-tier dividends of 4.7 sen declared in the 9MFY14 period, this amounted to 11.7 sen in FY14, which implies 40% dividend payout based on its reported FY14 EPS of 29.5 sen (or represents a net yield of 4.6%).

Earnings blossoming in FY15. This new set of results have altered our conservative view (previously with FY15E NP forecast of RM47.2m)n which were previously premised on the conservative assumption on its key earnings driver, the coffee brewing machines, of only +25% YoY (mainly from the 3rd model for their world-renowned coffee brewing system market client). Note that our previous assumption was a just shy below the management conservative guidance of +40%. Post results, we are turning more POSITIVE with the group’s earnings prospects, premised on: (i) the production ramp-up for its new coffee brewing machine (+40%), which will continue to be the fat margin products driving up the group’s profitability, (ii) its ongoing resilient orders of finished products ranging from vacuum cleaners, remote controllers, PCBA & plastic casings for other appliances and equipments. Subsequently, we have increased our FY15E NP to RM51.9m (by +10%) based on higher revenue growth assumption mentioned above and higher EBIT margin assumption of 3.7% (+1.1ppts) on better product mix and higher operating efficiency.

Reiterate our Trading Buy rating with a higher TP of RM3.16 (from RM2.61). We believe its valuation re-rating is warranted given its crystallising sizeable earnings as well as the commitment of dividend payout policy, which could give a decent net yield of c.4.5%. Post earnings upgrade, our TP has been raised to RM3.16 from RM2.61 based on a targeted 11.0x FY15 PER which implies a steep discount of 25% from the closest valuation from its peer, SKP Resources (trading at 14.5x FY15 PER) and 14% discount to current FBMSC Fwd. P/E valuation of 12.8x. Coupled with the net dividend yield assumption of c.4.5%, this could potentially reward shareholders with a decent total upside of c.27%. Looking at the current share price, its valuation is still cheap, trading at an undemanding FY15 PER valuation of 9.0x, which is at a 38% discount to its closest peer.

Source: Kenanga