• We initiate coverage on V.S. Industry Bhd (VSI) with a Buy recommendation and a target price of RM2.20. We like VSI for its leading position as a one-stop Electronics Manufacturing Services (EMS) provider in the country where its ability to undertake every stage of its client’s production process gives it an unparalleled competitive advantage to secure more sizeable manufacturing contracts. We also like VSI for its proven track-record and extensive experience as an Original Equipment Manufacturer (OEM) as well as an Original Design Manufacturer (ODM), which we think has strengthened VSI’s position as a leading EMS player in Malaysia.

• With its manufacturing facilities strategically located in Malaysia, China and Indonesia, VSI is able to cater to prominent consumer electronics brands from Europe, Japan and USA. Over the years, the group has steadily moved up the value chain by transitioning into an ODM from a pure OEM player by leveraging on the strength of its innovative research and development (R&D) team. This has allowed VSI to secure sizeable ODM contracts last year that included a three-year contract for the design and manufacture of a new model of coffee brewers for Keurig Green Mountain.

• Going forward, we expect significant box-build assembly orders from Client A, new ODM contracts from its regional clients, leaner cost structure due to higher capacity utilisation and increased automation to boost FY17 and FY18 net earnings by 20.1% and 51.4% Y.o.Y to RM141.6 mln and RM214.5 mln respectively.

• The group is expected to deliver a strong five-year revenue CAGR of 23.4% to RM3.98 bln by FY18, while net profit will stand at RM214.5 mln with a five-year CAGR of 41.4%. Accordingly, we rrived at VSI’s target price of RM2.20 by ascribing a target PER of 15.5x to its forecast FY18 EPS of 14.4 sen. The ascribed target PER is at a premium to industry average, which we believe is warranted due to leading position in Malaysia’s EMS industry.

Recommendation

Being the leading EMS provider in Malaysia and the fourth largest in Asean (Source: Manufacturing Market Insider 2016), VSI has come a long way from its humble beginnings as a plain vanilla OEM company in 1982 to its current stature. We like VSI for its extensive experience and strong in-house EMS capabilities, placing the group among the top-notch global EMS players like Foxconn, Pegatron and Flextronics. Due to its sheer size and competency, the group is able to achieve superior cost efficiency on the back of greater economies of scale, higher use of automation and innovative product process planning.

Being a one-stop EMS provider, VSI is able to undertake all production levels from the design to the manufacturing stage of each product, leading to better control over the processes and efficiency in its supply chain. As a testament to its holistic capabilities, VSI was awarded a ‘Vertical Integration’ (VI) status awarded by an internationally-renowned electrical appliances manufacturer (Client A) last year. We believe that the award will further cement VSI’s reputation, giving it an edge against its competitors and help to secure sustainable orders moving forward. We also think that the group could be increasing its in-house manufacturing processes (i.e.: wiring function), in-tandem with the spike in sales volume, which will improve its VI model, reduce its cost per unit and add to its competitive strength.

The group has enjoyed low net gearing at less than 0.6x for the last five years, with a war chest of up to RM218.4 mln in cash and cash equivalents in FY16 – indicating strong financial stability and prudent cash management which will allow the group to take advantage of any expansion opportunities.

Consequently, we like the company’s proven profit track record and solid earnings growth prospects of the group, underpinned by a significant increase in box-build orders from Client A, expansion in VSI’s client base with new ODM contracts secured from NEP Holdings, higher automation and rising sales growth from its existing regional clients like Perfect China and Fluidic Energy.

Source: Mplus Research - 9 Jun 2017