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Tuesday, January 7, 2014

V.S. Industry Bhd - Still Deeply Undervalued

Source: http://klse.i3investor.com/blogs/kenangaresearch/44467.jsp

INVESTMENT MERIT

Solid earnings track of record with four-year Net Profit (NP) CAGR of 70%. V.S. Industry (VSI), one of the electronics manufacturing services (EMS) provider for world-renowned manufacturers of office equipment and household appliances, has remained profitable since its listing in 1998. Over the past four years, the group has achieved a NP CAGR of 70%, from a low base. Noteworthy that it is listed as one of the top 50 contract manufacturers in the region supplying to world renowned electronics, electrical and audio-visual products manufacturers such as Panasonic, Sony, Canon, Mitsubishi, Kenwood, and Dyson.

1Q14 results beat expectations. VSI’s 1QFY14 NP of RM9.6m which registered a stellar growth of +24% QoQ (adjusted) and +25% YoY beat the consensus FY14 NP forecast by 17.5%. The robust growth was mainly on the back of improved sales mix from the Malaysia segment as well as lower losses incurred by the China operations. On a closer look at the improved sales mix from the Malaysia segment, we believe this was mainly contributed by the success of its diversification into high-margin customer base.

Hidden gem in V.S. International Group Limited (VSIG)? While we are cognisant of the higher quantum of losses from VSIG due to the consolidation, the silver lining is in the cost rationalisation (which is narrowing the losses) as well as the potential value unlocking of its industrial land in Zhuhai, which could offset the cost of losses from the consolidation.

Sizeable earnings to crystallise in 4Q14. We gather that the group has allocated capex of RM20m for its plastic injection machines for new coffee machine models and new assembly lines in FY14. The expansionary move is to cater for the higher orders from the world renowned coffee brewing system makers, from which we believe sizeable earnings could come into fruition starting from 4Q14. Coupled with its ongoing orders of finished products ranging from vacuum cleaners, remote controllers, PCBA & plastic casings for other appliances and equipments, we expect its FY14 earnings to double from FY13 with NP to register at RM45.2m, on the back of a robust revenue growth assumption of +48% YoY albeit a slightly lower NP margin assumption of 2.6%.

Minimum 40% dividend payout policy remains unchanged. Despite the higher net gearing of 0.6x (from 0.4x in FY13, as a result of the VSIG acquisition to turn it into a subsidiary from associate), we believe the group could maintain the underlying dividend payout track records of at least 40%. If we were to err on the conservative side by taking a 40% DPR from our FY14E EPS estimate of 23.1sen (note that VSI declared DPS of 5.0sen for FY13, which was 43% of DPR on an adjusted EPS basis), this would imply a 10.0 sen DPS, translating into a c.7% net dividend yield.

Trading Buy with a TP of RM1.95, based on a targeted 7.8x FY14 PER (being the group’s 3-year average forward PER). We also estimate the Group to reward to shareholders with a 10.0 sen DPS for CY14, bringing its potential total return to 35% from here.

Source: Kenanga

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