VS Industry (VS), as one of the world’s top 50 Integrated EMS providers, continues to showcase its strength by winning more stack-up orders from its key customers. We revisit this name again following the emergence of new re-rating catalysts that should anchor a two-year NP CAGR of 13%. Note that this is even after the high base earnings registered in FY15. Recommending TRADING BUY with a Fair Value of RM1.73 (+21% of total upside) based on 12.0x FY17E PER.

Up the ante. Recall that we discovered this gem two years ago and managed to lock in a total capital gain of 286% (back then in Mar 2015). Since then, it has continued to outperform and registered supernormal earnings in FY15 backed by stellar revenue performance and favourable currency translations. On its latest 9M16 results, even with the absence of favourable forex gains, NP still grew by 34% underpinned by solid revenue growth (+13%) as well as better EBIT margin (+1ppts to 9.0% on the back of favourable product mix and higher operational efficiency). Looking ahead, with further re-rating catalysts in sight, we re-initiate a Trading Buy position with a FV of RM1.73.

Dyson’s box-build assembly business to commence by early FY17. To our POSITIVE surprise, we gather that VS is already setting up a new assembly line to supply box-build assembly services for Dyson cordless vacuum cleaners; with mass production to commence by early FY17. This is on top of the ongoing orders for PCBA and Battery packs. Note that this new line could produce up to 20,000 units/week at max ramp mode and potentially adding up to RM400m/year to the group’s top line. More positively, management cited that there are chances for more orders being secured in the near term, which would require the group to set up another two lines should demand swell strongly. For now, our earnings forecasts only accounted for the projection of an additional box-build assembly line.

Minor hiccup that has now been resolved. We gather that there were some delays on the delivery of new coffee machine in Jun 2016 (third model by VS) to its US customer due to supply components issue. However, this has been resolved, with the shipment spilt over to Dec 2016. Recall that management previously guided a total of 2m shipment to be fulfilled by Jun 2016. Moving forward, the group will also be doing another new model for this US customer (announcement made yesterday), which might see its total product shipment rising to 3.0m a year in a blue sky scenario.

Synergistic value creation from the 20%-stake acquisition in NEP. Beyond the abovementioned, recently the group has also proposed to acquire up to 20.0% stake of the enlarged issued and paid-up capital of a company NEP which is principally involved in assembling, wholesaling, distributing, trading of DIAMOND brand water filtration systems and healthcare-related products. The acquisition cost of RM60m, to be satisfied by cash, implied a forward PER of 7.5x, based on a profit guarantee of RM40m NP in FY17. We are POSITIVE on the deal given the: (i) undemanding forward PER valuation which is below the industry average forward PER mean, (ii) profit guarantee of RM40m NP for FY17 (or RM8m after associate accounting) by NEP and high PAT margin (of mid-teens as of YTD 16) that NEP carries, as well as (iii) new stream of manufacturing revenue for VS (of RM100m/year).

TRADING BUY; FV of RM1.73. We are projecting the group to register FY16E/FY17E NP of RM122.9m/RM168.8m with key earnings assumptions being: (i) two-year revenue CAGR of 18% to be anchored by Dyson’s new box-build business (1st line contribution), new coffee brewing machine, new manufacturing job from NEP, as well as (ii) EBIT margin assumption of 7.9%- 8.1% on the back of healthy utilisation rate assumption. We value VS at RM1.73/share based on a 12.0x FY17E PER, a valuation which is at 15% discount from the valuation we ascribed to SKPRES, in view of its smaller quantum of earnings improvement due to high base.

Source: Kenanga Research - 17 Aug 2016