VS Industry Bhd
(Jan 17, RM3.05)
Maintain buy with an unchanged fair value (FV) of RM3.30: We reiterate our “buy” recommendation on VS Industry Bhd with unchanged forecasts and FV of RM3.30 per share. Our FV is pegged at a calendar year 2018 forecast price-earnings ratio of 15 times. We believe the selldown of VS Industry shares over the past few days has created a buying opportunity for investors. In our opinion, the knee-jerk reaction was likely caused by a misconception about the impact of a depreciating US dollar on VS Industry’s earnings.

Recall that in fourth quarter of financial year 2017 (4QFY17), VS Industry’s key customer introduced a cost pass-through mechanism that was meant to eliminate the effects of currency movements. This followed Bank Negara Malaysia’s ruling that mandated all domestic trades among residents be made in ringgit. Subsequently, all transactions between VS Industry and the key customer have been conducted in ringgit as opposed to US dollar previously. In a nutshell, unlike many exporting companies, US dollar movements have marginal impact on VS Industry’s earnings. However, we take note that about 20% of VS Industry’s sales are still denominated in US dollars. Factoring in the effect of some natural hedge, our sensitivity analysis suggests that every 2% appreciation/depreciation in the US dollar would improve/reduce earnings by 1%.

From our checks with management, operations of VS Industry remain on track. Operations in China are expected to return to the black in the next quarter, and box-build orders have started picking up as additional assembly lines came on stream in October and November 2017. Therefore, we expect earnings to go into full swing in second half of FY18 as the group captures contribution from the new lines.

VS Industry is also well prepared for more contract wins with its upcoming factory that could house up to 12 additional assembly lines. The group is currently in talks with an American-lifestyle product company to secure new jobs. If awarded, we estimate that the contract(s) would expand VS Industry’s revenue by RM1 billion to RM1.5 billion, and lift the company’s fair value to more than RM4.00 per share. Note that the potential contribution from these contracts has not been factored in our earnings projections.

All in, we believe fundamentals of the company remain intact and sturdy earnings growth lie ahead. — AmInvestment Bank Research, Jan 17