Strong orders, further deal wins to drive VS Industry: Maybank IB

PETALING JAYA: Maybank IB Research, which has initiated coverage on VS Industry Bhd, sees further growth opportunities in the company from further contract wins as well as stronger orders from existing key clients.
The research house said VS Industry’s established status as a vertically integrated player is a testament of its capabilities as a one-stop shop contract manufacturer.
“Currently serving several growing world-renowned consumer electronics brands including a prominent global consumer electronics brand (Customer X) and an American single-serve coffee maker, Keurig, we expect stronger orders from these existing key clients coupled with contract wins from new brands (Diamond) to drive our projected 14% 3-year earnings compound annual growth rate (CAGR) (FY16-19),” Maybank IB said in its initiation report.
Apart from existing printed circuit board assembly and battery pack manufacturing operations, Maybank IB believes that additional outsourcing (of plastic injection and box-build assembly) from Customer X is possible, underpinned by rapid expansion of VSI’s product range. With available floor space and prior experience, VSI is able to install up to four new production lines quickly to capture the surge in demand for Customer X’s end-products.
“For this, we expect VS Industry to see a slight margin expansion going forward. We have imputed contract wins worth RM280 million/RM600 million in FY17/18, bringing revenue contribution from Customer X to 37%/41% from 30% in FY16.”
It said further diversification in its customer base has landed new contacts for VS Industry’s China and Indonesia operations, which it projects will break even in FY17. VS Industry’s China plant has been earmarked to manufacture air/water purifiers for Perfect China/Diamond brands, potentially contributing RM200 million to group revenue over FY17/18.
VS Industry’s Indonesian arm has secured its first box-build assembly contract from US-based Fluidic Energy after over 10 years in operation, and has yet to be incorporated into Maybank IB’s forecasts.
“Despite a decent 14% earnings CAGR projection in FY16-19, we still see further growth opportunities from further contract wins. We like VS Industry for its diverse customer base and commendable profitability track record (20 years unbroken streak). At 12 times CY18 price-to-earnings ratio currently, this offers a decent entry point to the stock which could potentially outperform on new wins,” said Maybank IB, which gives VS Industry a “buy” call with a target price of RM1.78.