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Monday, January 16, 2017

VS - Big To Get Bigger

Author: PublicInvest   |   Publish date: Mon, 16 Jan 2017, 10:09 AM 


Forget any potential excitement surrounding currency-boosted earnings. Appreciate the fact that herein is a company which is just going to earn more from manufacturing a substantially larger amount of products in the coming financial years. VS Industry’s (VS) history is long, performance through the years mixed with its up and downs given the constant product life cycle changes and evolutions. Its future is bright in our view however, if it may not be too much to say. A vertically integrated Electronics Manufacturing Services corporation and which counts renowned multi-national corporations (MNCs) as its customers, VS is poised for double-digit earnings growth, underpinned by new substantial orders from existing key customers and contracts from new customers. We initiate coverage with an Outperform call and a target price of RM1.90 based on a 15x PE multiple to its fully-diluted FY7/18 earnings, the multiples appropriate in our view considering the anticipated jump in earnings going forward. Our valuation suggests a potential upside of 30.1%.
  • Growth drivers. i) Whereas the Group was quite reliant on a single customer in the past, conditions have changed in recent years to an extent that about 60% of its revenue is now contributed by 3 customers. This mix is not expected to change significantly in the near to medium term, the size of the pie is however, as VS is starting to see increased orders from all 3 key customers.

    ii) In July last year, VS proposed to acquire a 20% stake in NEP Holdings (NEP) for RM60m in cash, with the deal recently completed in November 2016. NEP is one of the largest water filtration system companies in Asia with c. 30% market share in Malaysia, c.20% market share in Singapore and c. 30% market share in Hong Kong. It is now penetrating into China through a partnership with Haier. Acquisition of NEP will provide 2 new income streams to VS, 1) additional manufacturing income, and 2) associate-related contributions from a fast-growing company.

    iii) Once plagued by capacity under-utilization which was a drag on earnings, operations in China and Indonesia are turning around and expected to be sustainable going forward, supported by increased orders from existing and new customers.
     
  • Dividends. The Group has a formal dividend policy stating a minimum 40% profit payout ratio. Given its healthy cash position, strong business growth prospects and low spending requirements in the near term, we see this easily attainable for the foreseeable future. VS has consistently paid out dividends (payout ratio averaging 46%) over the last 19 listed years. Based on its stated policy, potential forward dividend yields are attractive, ranging between 3.5% and 4.0%. Healthy earnings growth prospects translating to potentially healthy capital gains, coupled with decent dividend yields makes for an attractive investment proposition.
Source: PublicInvest Research - 16 Jan 2017

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