Strong earnings visibility for VS Industry

TheEdge Tue, Apr 11, 2017 10:31am - 6 years View Original


This article first appeared in The Edge Financial Daily, on April 11, 2017.

 

VS Industry Bhd
(April 10,RM1.92)

Maintain buy with an increased fair value (FV) of RM2.30: We value VS Industry at a higher FV of RM2.30 per share after raising our earnings estimates by 6% to 11% for financial year 2017 (FY17) to FY19. We have raised our FY17 earnings forecast (FY17F) to RM169.8 million (from RM153.4 million previously). 

We recently made a trip to VS Industry’s plant in Senai, Johor and are increasingly convinced about VS Industry’s earnings momentum going forward. 

We have raised our price-to-earnings valuation target to 14 times (from 13 times) on 2018 earnings per share to reflect a higher premium of 30% (from 20%) above its peers’ market cap weighted average. 

Our valuation represents around a 20% premium above SKP Resources Bhd’s valuation. We believe that the premium is justified due to VS Indusry’s stronger earnings visibility underpinned by increasing order flow from Customer X. VS Industry is currently the sole vertically integrated (VI) supplier for Customer X in Malaysia. 

Production of Customer X orders have ramped up quite nicely — the two assembly lines (set up on Dec 16 and Feb 17) were running briskly, while the third and fourth lines are expected to come onstream in May. 

Based on current monthly production levels, VS Industry looks set to achieve our box-build forecasted revenue of RM452 million in FY17 for Customer X. By year end, the fifth and sixth assembly lines would be added in anticipation of more box-build orders. 

As we turn increasingly confident about the production ramp up and execution timeline, we have raised our box-build unit sales assumption for Customer X by 18% to 31% for FY18 to FY19. 

The upcoming new factory building would be able to accommodate up to six box-build/full-assembly lines should future order flow necessitate further space expansion. 

In our opinion, the new available capacity would put the group in a strategic position to bid for future orders from its key customers, including Customer X. 

At Keurig factory, we were told by the factory manager that orders for existing and the new ODM brewer models have picked up strongly in recent months. Delivery of the new brewer model has been brought forward a month earlier to April to cope with stronger-than-expected demand. 

We gathered that Keurig has recently landed a spot in one of the largest retail chains in the US. With increased product visibility and shelf space across thousands of outlets, we think future order flows would remain strong. As we turn more upbeat about brewer sales growth, we have increased our unit sales assumption by 10% to 20% in FY17 to FY19. 

There are strong quarters in the cards. 

We expect the remaining quarters of FY17F to be nothing short of impressive due to the ramp-up for Customer X, and strong run-up in brewer orders recently — which coincide with the seasonally strong quarter for Keurig in the fourth quarter. This is even after accounting for the increase in labour costs for the intake of 1,000 foreign workers in the coming quarters. — AmInvestment Bank, April 10

The content is a snapshot from Publisher. Refer to the original content for accurate info. Contact us for any changes.






Related Stocks

SKPRES 0.900
VS 0.835

Comments

Login to comment.