· Strong closing to FY15. Recall that the group had recently reported 4Q15 NP of RM52.7m (+99% QoQ; +44% YoY), bringing its FY15 NP (+148% YoY) to RM132.7m which beat consensus’ FY15 estimates by 8%. Key positive deviation was the higher-than-expected EBIT margin driven by better product mix as well as favourable currency translations. Note that the currency gains were captured under “Net other income” which accounted c.50%/25% of 4Q15/FY15 EBIT. Looking at its FY15 performance, revenue increased by 13%, mainly driven by the sales from its customers that sell coffee machines and home appliances. Meanwhile, a fourth interim single tier dividend of 1.2 sen (per ordinary share of RM0.20 each) was also declared, bringing FY15 total DPS to 4.8 sen which represented c.40% of payout (vs FY14 total DPS of 2.34 sen) translating into a dividend yield of 3.1%.

· Resilient orders to anchor earnings growth in the future. We came away feeling POSITIVE from a recent meeting and visit to VS’s manufacturing facilities in Senai, Johor; having learnt that the overall orders from its key clients (a worldrenowned coffee brewing machine maker based in US, a top household appliances maker based in UK and a famous pool cleaner maker in Europe) remain resilient. In its coffee brewing machine segment the US customer (contributed 29% to the group’s FY15 total revenue), management targets to produce 20% more units in FY16, to be driven by new coffee brewer machines. Meanwhile, the group is waiting for positive consumer response on the cold machines before it officially starts to produce for the US customer. Meanwhile for the household appliances business with its UK customer (contributed 22% to its FY15 revenue), the group is ramping up its production volume for the manufacturing of PCBA and battery packs in light of the overwhelming response from its UK customers’ end products (bladeless fans and vacuum cleaners). With that, management expects the sales volume to increase by another conservative 10-20% YoY. Positive response was also seen with its European customer which is a leading manufacturer of pool-care equipment (contributed c.4% to its FY15 revenue). Note that VS has become the customer’s exclusive manufacturing arm for the new pool cleaner models in South East Asia. New sales volume meanwhile should reach 100k from CY15’s 75k units.

· Proposes Bonus Issue of Warrants to further increase shareholders’ equity participation. VS recently proposed a bonus warrant issuance of up to 290.8m bonus warrants on the basis of one (1) bonus warrant for every four (4) existing VS’s shares. The exercise price of the bonus warrants has been fixed at RM1.65/warrant which represents a premium of 18.06% over the five-day VWAP market price up to and including 16th October 2015. It is exercisable at any time within a three year period from the date of issue. Assuming the bonus warrants are fully exercised at the exercise price of RM1.65 each, the proceeds to be raised could be as high as RM479.8m which will be utilised for working capital purposes. We have yet to make any adjustment to the share base for now given the long exercise period. · Enjoying full swing benefits from strong USD trend. We gather that the group does not have any currency hedging position currently as the management is of the view that the natural hedging through raw materials (with 50% of its COS in USD) is sufficient to offset the risk, especially under the current strong USD trend. On the currency sensitivity analysis according to its Annual Report 2014, every 10% fluctuations in the USD will impact its FY14 bottomline by 8.8%.

· Not rated; FV of RM1.63. All in, we are projecting the group to register NP of RM158.6m (+20% YoY) in FY16 with key earnings assumptions being: (i) 14% revenue growth in FY16, to be driven by its new model coffee brewing machines (+20%), which will continue to be the lucrative margin products driving up the group’s profitability as well as its ongoing resilient orders of finished products ranging from vacuum cleaners, pool cleaners, remote controllers, PCBA & plastic casings for other appliances and equipments, and (ii) EBIT margin assumption of 9.3% on the back of healthy utilisation rate assumption. We value VS at RM1.63/share based on a 12.0x FY16E PER, a valuation which is in line with the EMS industry players’ average PER. Coupled with the net dividend yield of 3.5% in FY16E (DPR assumption of 40%), our TP of RM1.63 suggests a total upside of 9.3% from here. 

Source: Kenanga Research - 27 Oct 2015