The Group held a briefing yesterday to provide more details on the recently announced agreement it had entered into with a new customer, BITCBV, to manufacture certain homecare products that bear the BISSELL brand on a box build basis. On the plus side – the estimated annual contract size is potentially larger than what we had postulated (ie. RM500m), thereby producing better-than expected lifts to bottom line. On the minus side however, management did not provide more visibility on orders by its existing key customer, in particular a fairly significant one in which it does the full suite of EMS-related businesses (box-build assembly, printed circuit board and battery pack assembly). Hence, the less-than enthusiastic reaction to what should be a much-welcomed development, with its share price slipping overnight. That said, we are lifting our FY20 and FY21 estimates by an average 20% to account for this new contract win. Our target price is also lifted to RM1.10 (RM0.97 previously) on a 15x multiple to FY20 EPS. Our Trading Buy call is retained in anticipation of further contract wins.

• More on Bissell. Its products are sold in North and South America, Europe, the Middle East and other Asian countries such as Taiwan, Japan and China. In addition to the wide range of homecare products that include vacuums, sweepers, carpet-cleaning machines, steam and hard floor cleaners, cleaning formulas, as well as pet grooming and pet clean-up products, Bissell also provides commercial cleaning equipment to various industries under the brand Sanitaire, which was acquired from Electrolux. The Group currently has manufacturing facilities in Mexico and China, with the latter’s trade dispute with the US opening up this window of opportunity to VSI.

• Capital expenditure requirements are not anticipated to be significant, with an estimated RM5mn allocated for the installation of assembly lines. A dedicated facility in which the Group had already spent about RM35m previously to acquire and renovate will be set aside for this purpose. Encompassing 160,000 square feet, the plant will be equipped with injection molding facilities, assembly lines, a warehouse and a test lab. Labor requirements will not be an issue given the Group’s readily-available quota to hire at least 1,500 foreign workers which would be more than what’s needed for this purpose. Production is anticipated to commence late-3QCY19.

Source: PublicInvest Research - 7 Mar 2019