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Thursday, 14 September 2017 | MYT 10:30 AM

AmInvestment Research retains Buy call on VS Industry, higher fair value

KUALA LUMPUR: AmInvestment Bank Research is maintaining its Buy call on V.S. Industry (VSI) -- an integrated electronics manufacturing services (EMS) provider -- with a higher fair value of RM2.85 a share from previously RM2.30.

The research house had on Thursday raised its net profit forecasts for FY18F and FY19F by 9% to 19% and rolling forward its earnings base to CY18F. 

“We have also attached a higher price-to-earnings (P/E) multiple of 15 times (14 times previously) to capture potential jobs to be awarded in FY19F,” it said.

AmInvestment Research said it came away from VSI's company visit at Johor feeling upbeat due to the company's impressive prospects in FY18F and FY19F. 

“We gathered that additional lines were installed in mid-July and are fully operational. In addition, management guided that more lines are coming on stream in Oct-Nov 2017, thus our earnings upgrade,” it said.

The research house said VSI was seeking new jobs for an American lifestyle product and a Swiss hygiene system for FY19F. 

Together, the contracts could be worth more than 30% of VSI's FY19F revenue. However, the research house did not factor in earnings contribution from these until the awards come through. 

AmInvestment Research said for the upcoming 4QFY17 results, it maintained the view that earnings could be softer quarter-on-quarter.

The reasons are:

 (i) Delays in the execution of its production lines, which were initially set to commence in May. However, due to delays in the moulds’ delivery, the lines were only operational in mid-July. As such, meaningful earnings contribution from the additional capacity should only kick in the next financial year;  

(ii) Bank Negara has ruled that all domestic trade among residents shall only be made in ringgit. Management said that the effect was felt since May 2017, from which time settlements of its battery packs and printed circuit board assembly (PCBA) were made in ringgit (previously US dollar), while the purchase of raw materials remained in US dollar. 

“As the US dollar weakened over the past few months, we expect gross margins from such goods/services to contract in 4QFY17F. 

“Moving forward, management said the pricing of VSI's battery packs and PCBA services will take the USD impact into account. Therefore, we believe the negative impact from the ruling is transitory.
“We like VSI because: i) of its association with Customer X which enjoys robust growth prospects due to its product innovation; ii) it is a home-grown world-class electronic manufacturing services (EMS) player; and iii) its strong profit growth in FY17F-FY19F underpinned by capacity expansion,” said AmInvestment Research.