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VS Industry Bhd
(Jan 10, RM1.40)
Maintain buy with an unchanged target price (TP) of RM1.60: VS Industry Bhd is currently ramping up production for Bissell, Keurig and a new printed circuit board assembly (PCBA) customer, which is expected to mitigate lower orders from its key customer as one of the floor-care models reaches the end of the product life cycle. In addition to increasing orders from the abovementioned customers, we reckon that the group stands a high chance of securing new customers given its strong ability to secure new orders and its proven track record. While no new customer was announced during the briefing last Thursday, we understand that the group is in advanced stages of discussions with a number of prospective customers. We maintain our earnings forecasts and “buy” rating on VS with an unchanged 12-month TP of RM1.60.

Following the stabilisation of production of its first model for Bissell, currently running at an estimated utilisation rate of 80%, VS expects the next two models to come on stream progressively over the next two months. Besides, the group commenced production for its new PCBA customer in August 2019, and is currently at the tooling stage for its new box-build customer. In addition, VS has received more orders from Keurig as a result of trade diversion and is currently running more than five models for Keurig (three models in its financial year 2019 [FY19]). On a positive note, the group plans to participate in the bidding for the second half of 2020 new projects of its key customer.

VS’ management and business development team are currently in the US discussing potential new opportunities with four prospective customers involved in the home appliances industry. Should new orders come to fruition, we believe this would further diversify VS’ customer mix and enable the group to regain investor confidence. Based on our sensitivity analysis, every RM100 million new contract from a new customer could potentially increase the group’s core net profit by 2%-3% for FY20-FY22 earnings.

We maintain our earnings forecasts and reiterate our “buy” on VS, with an unchanged TP of RM1.60 based on a target calendar year 2020  price-earnings ratio of 16 times. We like VS for its: i) diversified customer mix; ii) strong ability in securing new contracts, making it a prime beneficiary of trade diversion; and iii) earnings growth on the back of new orders and lower losses from its China operations. Downside risks include a: i) key customer risk; ii) reliance on foreign labour; iii) a prolonged US-China trade stand-off; and iv) global economic slowdown. — Affin Hwang Capital, Jan 10


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