FW: Results: V.S. Industry (VSI MK; BUY; TP: MYR3.18) - The best is yet to come

 

 

Good morning,

 

We have a results note on V.S. Industry today.

V.S. Industry (VSI MK; BUY; TP: MYR3.18) – The best is yet to come

• Further traction in growth ahead; maintain BUY. FY7/17 core net profit of MYR176m (+30% YoY) trounced expectations at 110% of our/consensus forecasts. Coming quarters, we expect even stronger earnings growth momentum, driven by much larger orders at its box-build segment as its key client roll out new products in FY18. On that, we lift FY18/FY19 earnings forecasts by 14%/22%, TP to MYR3.18 (+14%), pegged to unchanged 17.5x CY18 FD EPS (in line with peers).
• Maximum potential yet to be unlocked. 4QFY17 headline net profit included multiple negative one-offs, mainly on impairments in (i) its Indonesian properties (MYR11.7m), (ii) 12.1% stake in Seeing Machines (MYR4.0m). Ex- one-offs, 4QFY17 core earnings was sequentially higher (+5% QoQ); we believe that VSI has yet to showcase its true earnings potential, especially for the Malaysian ops.  There was a one-time blip in 4QFY17 PBT for the Malaysian ops (-29% QoQ) despite a 20% QoQ surge in revenue; recall that VSI was required to switch its transactional currency to MYR (from USD) for components sold to local vendors following the introduction of Bank Negara's FX measures. VSI should be able to recoup its margin going forward. A fourth interim and proposed final DPS of 1sen each will take FY17 DPS to 5.9sen (+26% YoY), representing 60% DPR – above our forecast.
• A multi-year growth story. We continue to like VSI for its ability to win contracts for new products notwithstanding potential manufacturing localisation in markets where its clients are experiencing phenomenal demand growth. At 14x CY18 PER currently, valuations are undemanding for a growth stock with expected 3-year earnings CAGR of 30%.