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Investment Highlights

    We upgrade our UNDERWEIGHT recommendation on V.S. Industry (VSI) to HOLD with a higher fair value of RM1.60/share (previously RM1.32/share), pegged to an unchanged CY21F PE of 14x.
    We have raised our FY21F–FY22F forecasts by 27% to account for the higher contribution of VSI’s new customer, Victory as well as its other key customers, following updates shared from an investor briefing.
    Key takeaways from VSI’s briefing are as follows:
    Clearer picture of Victory’s contribution: The group will be producing on a box-built basis for both Victory’s cordless electrostatic handheld sprayer and backpack sprayer. VSI would be Victory’s first and only supplier outside of China, and production is expected to commence as soon as possible by 1QCY21 due to the overwhelming demand for Victory products brought upon by the Covid-19 pandemic. Victory’s revenue contribution starts at RM600mil for CY21 and is expected to reach a whopping RM1.5bil by CY23, which we have factored in our earnings forecasts
    Updates on existing key customers:

o VSI has secured additional jobs for its largest key customer, to produce more PCBA as well as additions to its current personal care product line. However, we note that the customer’s floor care product is reaching the end of its product life cycle and will be gradually phased out from production.

o For its US-based customer, VSI has confirmed that four additional models have been secured and it will be producing a total of nine models in FY21.The group may potentially secure up to a total of 12–13 models.

o Meanwhile, its pool care customer has seen benefit from synergies 1 year after its merger with a healthy growth in sales while its coffee brewer customer saw higher orders likely from remote working requirements following Covid-19 containment measures globally.

o Capacity expansion plans: VSI has dedicated floor space for new customer Victory in one of its existing facilities, while the US-based customer has been allocated an additional 180K sq ft due to its increased production needs. With all latest jobs considered, VSI’s facilities will be fully utilized in FY21. As such, the group is earmarking RM100mil capex to secure a 400K sq ft factory for future contract wins..

    All in all, we are positive on VSI’s diversification efforts and capacity expansion plan in preparation for additional opportunities to be secured by the group. Despite VSI’s positive prospects being intact, we deem that the market has already priced in the earnings growth at the current price. VSI’s positive prospects arise from: (i) sturdy box-build order growth supported by its key customers’ product launches; (ii) its ability to offer turnkey EMS solutions as a vertically-integrated player; and (iii) its efforts to diversify its customer base with potential opportunities to be secured from the US-China trade war. Key risk: (i) worsening Covid-19 impact on consumer demand of end-products

Source: AmInvest Research - 21 Aug 2020


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