VS Industry Bhd
(Jan 26, RM3.08)
Maintain buy with a higher fair value (FV) of RM3.23: We reiterate our “buy” recommendation on VS Industry Bhd (VSI) with a higher FV of RM3.32 per share (from RM3.30) after rolling forward our earnings base to financial year (FY19) from calendar year 2018. Our FV is pegged at an FY19 price-earnings ratio of 16 times.

VSI has proposed a one-for-four bonus issue of up to 397.6 million new shares. Assuming full conversion of outstanding share options, our target price will be rationalised to RM2.67 per share. We view the development positively as it could improve trading liquidity and the affordability of VSI shares.

We have trimmed our earnings forecasts by 10% to 17% for FY18 to FY20 on account of: lower-than-expected orders from Keurig and Zodiac; a rescheduling of the production of a product from October 2017 to May 2018; and a revision of our US dollar to ringgit assumption to 3.95 from 4.30. VSI’s prospects remain bright. The group has recently purchased two new factories in Johor. We understand that the new factories can house substantially more assembly lines, placing the group in a good position to bid for additional jobs in the future.

VSI plans to replace 30% of its manufacturing processes in Malaysia with automation. The group is installing more than 20 units of robotic equipment that facilitate the plastic injection and spraying processes. Management has indicated that one unit is expected to save two to three workers, who are being paid about RM3,000 per month. Assuming a 10% depreciation rate, we estimate that 25 units of the equipment can bring about net savings of up to RM2.5 million per year. We expect earnings to go into full swing in the second half of FY18, as the group captures contributions from additional assembly lines that came on stream in October and November 2017. Operations in China are set to return to the black in the next quarter as production of air purifiers and air conditional components pick up.

We continue to like VSI due to its association with a key customer, who plans a slate of new product launches over the next few years; its ability to offer turnkey electronic manufacturing service solutions as a vertically integrated player; and its handsome growth prospects for FY18 to FY20, underpinned by sustainable capacity expansion. — AmInvestment Bank, Jan 26