VS Industry Bhd
(Sept 29, RM1.39)
Maintain buy with an unchanged target price (TP) of RM1.72: After growing revenue from Dyson Ltd by 52% in financial year 2016 (FY16), orders from Dyson would continue to accelerate in FY17 as VS Industry Bhd takes on full-assembly jobs to manufacture cordless vacuum cleaners. This is in addition to the existing printed circuit board and battery pack orders from Dyson.
Production ramp-up could start as soon as next month or November, and we estimate this could contribute to around RM400 million to RM500 million to FY17 forecast top line. FY18 could see a further surge in Dyson orders, as more assembly lines go live in the first half of this year.
Keurig Green Mountain Inc’s orders would also pick up in FY17 as VS Industry commences production of its first original design manufacturer-brewer model in January. The first quarter of FY17 (1QFY17) would see a catch-up in delivery of brewer models initially scheduled for shipment in 4QFY16. VS Industry’s Indonesian operations turned profitable in FY16 on better utilisation. Excluding the impairment on deposit paid for the solar project, core operations in China booked a RM2.9 million in profit before tax, from RM7.6 million in losses last year. In the coming year, profitability in China would be buoyed by orders of water filtration products from NEP Holdings (M) Bhd, which would add at least RM100 million per annum in revenue. Recall that NEP Holdings has a five-year tie-up with a subsidiary of Haier Electronics Group Co Ltd to distribute the former’s products via the latter’s strong 40,000 retail outlets.
We continue to like VS Industry for its diversified and growing earnings base from key customers such as Keurig, Dyson and Zodiac. As results were in line, we make no changes to our earnings forecasts and TP of RM1.72, supported by a corroborative discounted cash flow valuation. Key risks to our forecasts include weak consumer sentiment, plant accidents and foreign-exchange movements. — RHB Research Institute, Sept 29