KUALA LUMPUR (Aug 21): Hong Leong Investment Bank (HLIB) Research has upgraded its rating for VS Industry Bhd (VSI) to “buy” and raised its target price to RM1.99 (from 94 sen) on higher expected earnings after the company recently bagged a lucrative supply contract.
HLIB, in a note today, raised its earnings forecast for VSI by 65% to 76% to RM183.8 million and RM218.5 million for the financial year 2021 (FY21) to FY22 respectively, premised on higher revenue projection and improving utilisation rate.
On Tuesday, VSI said it had signed an agreement with US-based Victory Innovations Company Inc to manufacture and supply cordless electrostatic sprayers on a box-built basis.
The research house said Victory’s products, cordless electrostatic handheld sprayers and cordless electrostatic backpack sprayers, are used by hospitals, hotels, schools, airlines, casinos, public transportation, households and businesses to sanitise and disinfect large areas swiftly and effectively.
“We are positive on this development and view this as a testament [to] VSI’s ability to secure new contracts despite the uncertain economic environment. We understand that Victory is an unexpected customer that VSI acquired due to the overwhelming demand for this machine,” said HLIB analysts Syifaa’ Mahsuri Ismail and Tan J Young.
“Observing the continuing spike in Covid-19 cases globally, filling up orders are in VSI’s priority list as both products are currently in short supply. Currently, Victory only has one contract manufacturer in China and VSI is their first and only supplier outside of China,” the analysts added.
The duo said VSI has successfully secured a contract of RM600 million for the calendar year 2021 (CY21) and guided the contribution from Victory to be in an upward trend of RM1.4 billion and RM1.5 billion for CY22 and CY23 respectively.
Additionally, VSI is able to start production for Victory without any major capex spending as the former is slowly phasing out floor care products, which it currently supplies to a UK-based customer, from its production line, freeing up floor space and labour, the analysts said.
“VSI is also benefiting from their long-existing partnership with [a] coffee brewer. We understand that there has been a sudden spike in orders for coffee machines on top of a strong rebound from existing high demand as customers stock up for Christmas and year-end sales,” they said, forecasting an increase in contributions from the product to RM250 million to RM300 million annually from RM200 million previously as lockdown measures caused most consumers to buy their own coffee machines.
Looking ahead, the analysts believe VSI can benefit from the US-China trade war.
VSI managed to ink a deal to manufacture floor care products for a US company in March 2019 which was previously manufactured by two China-based electronics manufacturing services (EMS) provider.
“VSI [has] been awarded with [an] additional four models (with a total of nine) from [the] US customer with contribution to top line amounting to RM800 million for FY21. Projection is expected to be positive and VSI could potentially secure a total of 12 models with revenue contribution to be RM1.2 billion for FY22,” the analysts said.
“We gather that VSI is still in active negotiations with five prospective customers. The movement restriction that was implemented has caused a slight delay in forging new relationships. However, with the ongoing US-China trade rift and gradual border reopening, the negotiations have started to pick up where they left off.
“From our channel check, should another partnership materialise, VSI is looking to buy another 400,000 sq ft plant to support this growth as they are expected to operate in full capacity by FY21. As the biggest EMS player in Malaysia with [a] solid track record, we opine that VSI is on trajectory to achieve new high order value amongst the intensifying trade diversion,” they said.
HLIB’s revised target price of RM1.99 reflects the rise in earnings forecast as well as the higher PE multiple of 17 times (previously 15 times) of FY22 EPS.
“We view the premium PE multiple is justifiable, taking into account VSI’s multi-year growth trajectory from existing customers coupled with the proven capability to secure more projects that yield higher margins in the near future,” the duo concluded.
VSI shares were up five sen or 2.79% to RM1.84 this morning, valuing the EMS provider at RM3.35 billion. Around 11.12 million shares were traded.
The counter plummeted to a yearly low of 63.5 sen on March 18, but has since been on an upward trajectory, erasing its losses and standing 37.31% higher year-to-date from RM1.34.