Bursa Malaysia (KLSE) Stock Investment Portal

VS (6963)

V.S. Industry (VS) has announced that it has entered into a contract manufacturing agreement with an existing major customer to design and manufacture a new model of coffee brewer for a minimum contract value of USD82m (or equivalent to RM326m) within a period of three years. Comment • Moving up the value chain. We are pleasantly surprised with the contract win. We believe the Group has won the manufacturing contract from Keurig, which is its existing key client. Currently, VS is only focusing on assembly works for Keurig’s coffee brewers.

The new coffee brewer is the first fully designed model by VS for the customer, i.e. Original Design Manufacturing (ODM) and the Group has been granted exclusive manufacturing rights for the first 18 months. • Expect to have better margin. We opine that VS could command a better margin for the contract especially on the design scope of works, with estimated net margin of over 7%. Besides, the ODM role played by VS would forge closer ties with Keurig instead of just being an OEM producer.

The mass production is scheduled to commence from January 2017. Hence, we envisage the manufacturing contract to contribute RM64m revenue and RM4.5m net profit for FY17, whilst full impact will only be seen in FY18 with respective topline and bottmline contribution of RM109m and RM7.6m. Earnings Outlook/Revision • We take this opportunity to fine tune our profit estimates, raising FY17 net earnings by 8.5% to RM177.6m and FY18 net earnings by 9.0% to RM210.6m, whilst tweak down FY16 net earnings by 2.6% to RM132.2m after taking into account:

1) this new coffee brewer contract;

2) Manufacturing revenue for NEP’s Diamond water filters under its China operation and its associate profit in the company;

3) production delay for the existing Keurig’s orders during 1HCY16 but expected to pick up in 2HCY16 as highlighted by the management; and

4) projecting higher sales and margin from its China operation following recent contract win of RMB400m (or equivalent to RM242m). Valuation & Recommendation • Maintain BUY on VS with a higher target price of RM1.75 (from RM1.50) following our earnings upgrade and higher PE assigned. Our fair value is now based on 13.5x (from previous 12.5x) FY2017F PE with diluted EPS forecast of 13 sen.

The target PER for valuation of VS is at the historical peak PE of the Group in view of its commendable future earnings growth and strong order pipeline coupled with its resilient business model as a leading Electronics Manufacturing Services (EMS) provider locally and decent dividend yield.

Fundamental AnalysisTarget Price *(RM)1.75*CallBuy (Rated)