This article first appeared in The Edge Financial Daily on September 29, 2017

VS Industry Bhd
(Sept 28, RM2.65)
Reaffirm outperform with an unchanged target price (TP) of RM2.83: VS Industry Bhd’s net profit for financial year 2017 (FY17) of RM156.3 million (up 32.6% year-on-year [y-o-y]) is its best ever on record, and was in line with our and consensus expectations at 99.2% and 98.1% of full-year estimates respectively. Growth was robust, underpinned by a constant rise in new sales orders, particularly in its Malaysian operations. We remain excited about VS Industry’s prospects and reaffirm our “outperform” call with an unchanged TP of RM2.83 based on an 18 times multiple to its 2018 earnings per share. Three-year compound annual growth rate (FY17 to FY20) is anticipated at 28%, deeming the higher multiple justifiable in our view. A fourth interim single-tier dividend of one sen was declared, bringing total dividends for the financial year to 5.9 sen, exceeding our forecast of 5.3 sen.

Revenue for FY17 jumped 50.8% y-o-y to RM3.28 billion, with equally strong contributions, percentage-wise, coming from its three operating geographies — Malaysia (+54.0% y-o-y), Indonesia (+53.2% y-o-y), and China (+42.1% y-o-y). Management expects a continuing trend of rising sales orders to sustain growth going into FY18 and beyond, optimism we share considering the growth aspirations of some of its existing key customers. China remains a wild card, with the group also reportedly on the verge of securing orders from new customers.

Net profit of RM156.3 million (+32.6% y-o-y), though higher in line with the growth in revenue, was marred by a RM4 million impairment charge on its Seeing Machines Ltd investment and a RM12 million impairment charge on its Indonesian properties owing to the strengthening of the US dollar against the rupiah since the last valuation done in 2013. Excluding these items, net profit would have been RM169.5 million. Operating margins weakened somewhat owing to fluctuations in its US dollar-denominated costs, which we expect to stabilise and improve going forward as the group has agreed on a pricing mechanism with its key customers to mitigate this issue.

Box-build assemblies for a major customer remain on track to jump substantially in the coming financial years. We have recently highlighted that VS Industry could also potentially be in the running to secure new contracts from one US-based and one Swiss-based customer for its Malaysian operations, potentially bumping up revenue by a further 5% to 10%. Incidentally, the group is already laying the groundwork for a new manufacturing facility cum warehouse, which could suggest something potentially on hand, though management stresses this move as a pre-emptive one in anticipation of increased orders from both existing and new customers. We conservatively account for this expansion, but only from FY20 onwards. Contributions could kick in as early as FY19, we reckon, if anything. This aside, we are also excited about the prospect of another key customer, Keurig Inc, which, as we understand, will be making its first shipment to an Asian country early next year. While hugely popular in the North American and European continents, such a pervasive coffee-consuming culture is not yet as prevalent in Asia as a whole, though it is a matter of time before it (and Keurig) catches on significantly. — PublicInvest Research, Sept 28