VS reported a 29.1% YoY jump in its 2QFY17 net profit to RM35.5m, driven by a particularly strong contribution from its China operations on higher-than-expected production demand. While cumulative 1HFY17 net profit of RM69.0m only makes up about 44% of our and full-year consensus estimates, we deem the results to be in line on expectation of stronger quarters ahead as the pace of production from its new contracts pick up pace. We continue to like the group’s growth proposition and reaffirm our Outperform call with an unchanged target price of RM1.90 based on a 15x multiple to its fully-diluted FY18 EPS. A second interim single-tier dividend of 1.2sen was declared, bringing total dividends for the financial period to-date to 2.4sen. To re-cap, the Group has a 40% dividend payout policy, suggesting a 5.3sen payout for the year (c. 3% yield) on the current share base.

• Revenue for 2QFY17 hit a record-high RM763.8m, contributing to a cumulative RM1.44bn (+29.7% YoY) for 1HFY17, driven by healthy expansions in its 3 main geographies – Malaysia (+27.3% YoY), Indonesia (+38.2% YoY) and China (+33.8% YoY). Further near-term growth is expected in the coming quarters on the commissioning of more lines for its box-build assemblies in Malaysia, and anticipated replenishments of sales orders from its existing customers in China.

• Net profit of RM35.5m (+29.1% YoY) for 2QFY17 was higher in line with the growth in revenue (+52.4%) though the proportionate increase was lower through seepages in minority interests given the bulk of growth this current quarter coming from its China operations in which it only owns a 43.6% interest. Cumulative net profit for 1HFY17 was 21.3% lower YoY to RM69.0m however, due to 1) lower exchange gains of RM6.9m in 1HFY17 vs RM12.8m in 1HFY16, 2) higher start-up and plant setup costs incurred in Malaysia in preparation for production volume increases whereby 1,000 foreign workers were hired in 1QFY17 with no corresponding revenue contributions, and 3) higher tax rates owing to absence of export tax incentives.

• Growth drivers. Box-build assemblies for a significant customer are anticipated to surge in the coming years, alongside complementary growth in PCB and battery pack assemblies. Capacity and capability-wise, VS remains able to produce up to 4m units of box-build assemblies for this customer, immense potential growth coming from the near-zero base at this juncture. Meanwhile, Keurig remains a dark horse in the growth equation of VS. Why? Keurig is now owned by JAB Holdings and is now part of a global coffee platform with some of the world’s best and largest coffee-related businesses with ample cross-selling opportunities. While hugely popular in the North American continent, such a pervasive coffee-consuming culture is not yet as prevalent in Asia as a whole, though only being a matter of time before it (and Keurig) catches on significantly. With more than half the world’s population this side of the divide, such is the potential market space. Throw NEP Holdings and its robust growth into the mix, the future is bright.

Source: PublicInvest Research - 29 Mar 2017