Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with a lower fair value of RM1.27/share (previously RM1.30), pegged to an FY21F PE of 14x.

• We reduce our FY20F–FY22F forecasts downwards slightly by 1–2% after tweaking forecasts for its Malaysian segment to account for: (i) a tapering in orders for one of its key customer’s model due to reaching the end of product life cycle, and (ii) net changes in its PCBA orders from a reduction in existing customers’ orders and the addition of newer orders.

• We attended VSI’s 4QFY19 results briefing with the following key takeaways:

1. Better-than-expected FY19 results due to favourable product mix for a key customer in VSI’s Malaysia segment: Post-1QFY19, VSI had issued a profit warning as there was an anticipated dampening of orders for one of its key customers in its Malaysian segment following a change in its number of assembly lines. However, some models were replaced by others that performed better in the market which resulted in larger economies of scale and improved production efficiencies for VSI. We note that FY20F contribution for said customer is anticipated to decline due to one of its model’s reaching the end of product life cycle, which we have factored into our forecasts.

2. Commenced production of the first model for Bissell: The group has begun mass production for Bissell’s first carpet cleaner model in September 2019 with delivery to start by the end of October 2019. There is a total of 5 models confirmed with other lines ensuing once the first line’s production stabilizes.

3. New customers for the Malaysian segment: In July 2019, the group shared that it had secured PCBA orders from a new customer which are expected to contribute RM200mil revenue in FY20F. This partially mitigates the anticipated decline in overall PCBA orders as some of VSI’s customers head towards self-sufficiency by producing PCBA in-house. On top of this, VSI has managed to secure another full-assembly customer, expecting to contribute RM100mil revenue per annum.

4. Continuing efforts to improve overseas operations:

For its Indonesia segment, VSI will focus on securing orders and improving utilization rates where the segment is expected to sustain its performance. Meanwhile, the group shares that its China segment’s challenging operating environment is expected to persist with weak sentiments, resulting in a continued underutilization of its facilities.

For VSI’s China segment, the group has been focusing on: (i) downsizing operations though cost-rationalization efforts, incurring a net one-off loss of RM35mil in FY19 from the disposal and impairment of PPE and termination benefits, and (ii) strengthening its financial position to minimize impact on its operations. 5. Ongoing discussions with prospects following the US-China trade war: The group continues to engage with prospective customers to potentially secure new orders by FY2020.

• All factors considered, we maintain our HOLD recommendation on VSI as the outlook for its overseas operations, particularly China, remains challenging while its positive prospects arising from expected stable growth of box-build orders FY20F onwards from its key customers in Malaysia have been largely priced in

Source: AmInvest Research - 2 Oct 2019