VS Industry Bhd
(Oct 1, RM2.56)
Maintain “buy” with target price of RM2.92. VS Industry reported a better-than-expected financial year 2014 (FY14) earnings. The fourth quarter of financial year 2014 (4QFY14) was a record quarter with earnings of RM36.5 million, driven by sales from the new coffee machine model that began in May, as well as tax incentives for exports.

We raise our fair values (FV) to RM2.92 from RM2 after upgrading our earnings forecasts and upgrading our call to buy from “neutral”.

VS Industry’s FY14 earnings of RM53.6 million was up 22% y-o-y  which had exceeded our and consensus estimates at 185.5% and 169.6% of full-year forecasts respectively. Its exceptional performance was achieved on the back of better earnings from its Malaysian operation and tax incentives for its exported coffee machines.

Although its turnover in Malaysia grew just 5.7% y-o-y, its profit before tax surged 78.7% y-o-y on the back of an improved sales mix, particularly contribution from the higher margin coffee machines.

Its subsidiary, VS International Group Ltd, is still in the red and we reaffirm our view that it may take some time before we see a positive contribution there.

A 3.5 sen third interim dividend was declared which would be followed by a final dividend of 3.5 sen at a later date, bringing the total FY14 gross dividend per share to 11.7 sen or 41% payout ratio.

In view of the better-than-expected FY14 earnings, we raise our earnings forecast for FY15 by 60% on the contributions from the sale of existing coffee machine models, contribution from sales of a new coffee machine model by 4QFY15 and remaining tax incentives of RM15 million that will be utilised in FY15.

We also take the opportunity to introduce our FY16 earnings forecasts. However, note that we have assumed a normalisation of effective tax rates in FY16.

Risks to our call include weaker-than-expected global economic environment that could dampen sales and dependence on orders from key customers.

We are positive that its coffee machine sales would sustain its earnings momentum moving forward and upgrade our call to buy.

Following our earnings revision, our FV rises to RM2.92 from RM2 based on recurring FY16 price-to-earnings ratio (PER) of 10 times from 9.5 times previously, broadly in-line with its closest peer, SKP Resources Bhd’ 11 times valuation.

It is currently trading at an undemanding recurring FY16 PER of 9.1 times, relative to its profit-earnings growth of 0.56. — RHB Research, Oct 1
 

This article first appeared in The Edge Financial Daily, on October 2, 2014.