· 1QFY15 results above expectations. V.S. Industry (VSI) recently reported a 1QFY15 normalised Net Profit (NP) of RM31.2m, a robust growth of +69% QoQ and +327% YoY respectively. Note that the 1QFY15 normalised NP has been adjusted by excluding tax gains related to the enhanced export incentives which amounted to c.RM4m. Even so, the results came in way above expectations, beating our full-year forecast and the consensus by 35% and 30% respectively. The key positive deviations were due to: (i) higher-thanexpected revenue which we believe was driven by new coffee brewing machines and (ii) higher-than-expected EBIT margin on the back of favourable product mix and higher operational efficiency and (iii) lower than expected losses in the China segment. Taking a closer look at its 1QFY15 results, EBIT soared by 86% QoQ to RM47.6m due much to higher EBIT margin of 8.7% (+3.9ppts from 4QFY14) resulting from improved sales mix for the Malaysia operations.

· Stronger dividend in the pipeline. As expected, a first interim single tier of 3.0sen dividend per share (DPS) (vs. 2.2sen net DPS in FY14) was declared, which implied 19% of dividend payout ratio (DPR) for the quarter. Although the 1Q15 implied DPR was below its dividend policy (min. 40% DPR), we are not worry of the shortfall as the group will usually declare a final single tier dividend in the final quarter to fill up for the gap based on its historical trend.

· Earnings blossoming in FY15. 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 (+55%), 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 equipment and (iii) margin expansion mainly due to the higher utilisation rate. Subsequently, we have increased our FY15E NP to RM71.3m (by +37%) based on higher revenue growth assumption mentioned above and higher EBIT margin assumption of 4.7% (+1.0ppts) on better product mix and higher operating efficiency. We have also introduced our FY16 projections with revenue growth assumption of +8% and EBIT margin assumption of 4.5%.

· Reiterate our Trading Buy rating with a higher TP of RM3.56 (from RM3.16). 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.5.6%. Post earnings upgrade, our TP has been raised to RM3.56 from RM3.16 based on a lower targeted 10.0x FY15 EPS (to align with the forward FBMSC P/E valuation of 10.5x) which also implies a steep discount of 34% from the closest valuation from its peer, SKP Resources (trading at 15.1x FY15 PER). Coupled with the net dividend yield assumption of c.5.6%, this could translate into a decent total upside of c.46% to shareholders. Looking at the current share price, its valuation is still cheap, trading at an undemanding FY15 PER valuation of 7.1x which is at a 53% discount to its closest peer.

Source: Kenanga