VSI’s 1QFY14  (FYE July)  results beat expectations on: i) stronger sales and ii) better cost controls at its China operations.  We raise our  FV to MYR1.42  (from MYR1.18)  after upgrading earnings and P/E valuations. We keep the stock at NEUTRAL, as: i) its current P/E valuation is fair (at its  6-year mean), ii) we are cautious of seasonal weakness in the next two quarters, and iii) weakening orders from key customer Dyson.

• Results  beat  expectations.  1QFY14  net  profit  rose  to  MYR9.6m (+23.9% q-o-q; +24.8% y-o-y)  on the back of a 21.5% q-o-q rise in sales (+33.4%  y-o-y),  as    seasonal  orders  for  touch  screens  (NextWindow) and coffee machines (Keurig) soared pre-Christmas. We understand this offset  the  slowdown  in  vacuum  cleaner  orders  from  Dyson  and  took 1QFY14  earnings  to  42.5%  of  our  original  forecast.  While  we  are cautious of seasonal weakness in 2Q  and  3Q, an earnings upgrade is warranted.  A  2.2  sen  dividend  was  declared  (1QFY13:  2  sen  interim dividend).
• Stronger  sales but flat  margins. EBITDA dropped  45.0% q-o-q as VSI enjoyed  a  MYR28.5m  one-off  gain  from  the  VS  International  Group (VSIG)’s  (1002  HK,  NR)  consolidation  in  4QFY13.  Stripping  this  out, EBITDA  would  have  been  up  18.1%  q-o-q  (+33.9%  y-o-y),  in  line  with sales  on  flattish  margins.  While  losses  in  China  have  shrunk,  locally, unlike competitor SKP Resources (SKP MK, SELL, FV:  MYR0.20), VSI has been ramping up non-Dyson orders  (see above),  giving the group a more diversified earnings base.
• Raising  forecasts. We  raise  our  FY14/15 forecasts  by  14.6%/48.3% to MYR25.8m/MYR26.3m after raising  our  FY14 revenue growth forecaststo 36.6%  (from 10.0%) on:  i) VSIG’s consolidation, and ii)  assumption of increasing touch screen and coffee machine orders in 2014.
• Raising  FV  to  MYR1.42  (from  MYR1.18),  maintain  NEUTRAL.  We maintain our NEUTRAL call with a higher MYR1.42 FV – based on: i) our now higher CY14 EPS, and ii) a higher target P/E of 10x (from 9x), in line with  the stock’s  6-year historical mean.  While we remain cautious of a slowdown  in  2Q  and  3Q  (as  seen  in  FY13),  should  VSI  continue  its earnings trajectory, we could see its P/E valuations re-rating upwards. 

Financial Exhibits

• Stronger topline growth with the inclusion of VSIG

SWOT Analysis

Company Profile
VS Industry is an integrated  electronics manufacturing services (EMS) provider for world-renowned manufacturers of office  equipment and household appliances.

Recommendation Chart

Source: RHB