VS has continued to see more stack-up orders from its key customers across all segments; thanks to its VI capabilities and proven track of record servicing global customers. With the commencement of new box-build assembly lines alongside resilient orders in China and Indonesia markets, we expect a 2-year NP CAGR of 30%. That said, we believe most of the known positives have already been priced in following the 99% YTD share price appreciation. Switch to Non-Rated with a higher FD FV of RM3.10.

Not resting on its laurel. Recall that we re-initiate the Trading Buy position on August 2016 (at RM1.43). Since then, it has continued to outperform with capital gains of 95% to RM2.79 and registered strong earnings in FY17; with CNP of RM173.8m being recorded (which was 3% higher of our FY17E CNP of RM168.8m). On its latest FY17 results, even with the marginally lower GP margin of 14.0% (-1.5ppts) due to the higher costing resulting from the transition of USD- based sales to MYR, CNP still soared by 28%. Note that a cost pass-through mechanism is now in place to minimise the fluctuation of currency movement.

More box-build assembly lines to anchor 2-year revenue CAGR of 38% in Malaysia operations. From the recent meeting, we understand that the existing box-build assembly lines in Malaysia are already running at optimal capacity; with robust orders seen on the consumer electronics (CE) and beauty products. As the lines are insufficient to cater for the voluminous orders, the group has already set up a few more new assembly lines and we expect to see additional earnings contribution as soon as 2QFY18. While the existing factories are sufficient to house these new assembly lines, the group is already building a new factory which can house additional capacity of 12 lines with completion targeted by mid-2018. We take this as a positive sign of the group’s confidence in securing more new orders given the group’s historical record of prudent capex planning. Meanwhile, we expect orders for coffee brewers to resume its growth trend (2-year sales CAGR of 15%) with its client expanding the geographical footprint into the SEA market. On the other hand, we expect moderate sales growth from its European customer which provides pool cleaning products.

Decent prospects in China and Indonesia markets. Note that the group’s China operation- VSIG (43.5% subsidiary) has finally turned profitable in FY17 with the successful transformation from exportoriented sales (which are more susceptible to orders fluctuation) to cater for the local market. The production of air purifiers for its OEM customer is marked as the door-opening opportunity for its operations in China, which successfully attracted few new interests on the group’s OEM services for similar products. Though the growth is not as robust as Malaysia’s operations, we still expect mid-teen growth for FY18E/FY19E which will be anchored by resilient orders mainly from the air-purifiers. Meanwhile on the Indonesia operations, demand for its PCB assembly is still robust with further ramp-up to be seen from current level.

Non-rated; higher FV of RM3.10. We are projecting the group to register FY18E/FY19E NP of RM238.2m/RM294.9m with key earnings assumptions being 2-year revenue CAGR of 30% to be anchored by new box-build businesses for CE and Beauty products in Malaysia, Air purifiers (OEM)/PCBA in China/Indonesia operations as well as an EBIT margin assumption of 7.5%. We value VS at RM3.10/share based on a 15.0x FY19E PER, a valuation which is at +2SD above its 5-year average PER. While we still like the company’s business model, we believe risk-reward is no longer favourable considering its YTD performance of +99%, which offers limited upside from our new TP. Thus, we switch our Trading Buy call to Non-rated. We will review our call if there are future earnings catalysts.

Source: Kenanga Research - 5 Oct 2017