Founded in 1982, VS Industry (VS) is a leading electronics manufacturing services (EMS) provider with 35 years of track record under its belt. The firm is primarily engaged in the production of plastic injection moulding, printed circuit board, battery packs as well as sub/full assembly of consumer electronic products.

Vertical integration in the company’s business allows it to provide one-stop manufacturing solutions to customers (as both original equipment manufacturer (OEM) and original design manufacturer (ODM)), from product design to product fabrication and assembly. Together with its Hong Kong-listed subsidiary VS International Group, the firm has manufacturing facilities in Malaysia, China, Indonesia and Vietnam to serve an international client base.

According to Manufacturing Market Insider, VS is one of the top-50 EMS providers in the world based on 2015 sales figures, ranking the company alongside big names like Foxconn, Pegatron and Flextronics. VS also boasts an international client base which include big names like Dyson, Zodiac, Keurig, Panasonic, Amway, Epson and Hitachi.

Latest Earnings Impacted By Impairment

In the past five financial years, top and bottom lines have generally been on an uptrend. Between FY12 and FY16, revenue grew at a compounded annual growth rate (CAGR) of 16 percent to RM2,175.6 million while net profit recorded a 36.4 percent CAGR to RM117.9 million.

The improvement over the years was largely driven by strong contributions from its main customers including Dyson, Zodiac and Keurig, with a better sales mix also driving profitability. VS is a largely export driven firm, with more than 70 percent of FY15 turnover attributable to customers based outside of Malaysia.

While the company’s reported FY16 earnings declined 11.2 percent year-on-year, we note that it was mainly due to a RM21.8 million impairment made for deposits paid for the proposed acquisition of a 20 percent stake in a solar power project. Although efforts are still ongoing to recover the deposits paid, management decided to be more prudent and incur the provision in the period.

Excluding the one-off impairments and forex gain, FY16 profit before tax actually grew 28.6 percent. Operationally, the business remains strong with management upbeat on FY17 prospects.

New Contracts Buoy Prospect

VS announced in July the acquisition of a 20 percent equity interest in NEP Holdings (NEP), producer of the famous “Diamond” water filtration system. The deal comes with a profit guarantee of RM40 million for FY17.

The acquisition is seen as synergistic, given that VS can open up a new revenue stream by being an OEM/ODM manufacturer for NEP, while the latter can tap on the former’s research and development capabilities to develop new product offerings.

From later new releases, it is understood that group has also secured committed minimum RM100 million orders per annum to manufacture water filtration-related products from NEP.

Additionally, VS has secured a three-year, US$82 million contract from an existing key customer (said to be Keurig) for the manufacture of a new model of coffee brewer – the first model fully designed and engineered by the group. Mass production is targeted by January 2017 and should thus contribute positively to the group’s FY17 revenue.

Furthermore, FY17 revenue is expected to be driven by a RM400 million sizeable box build assembly contract for vacuum cleaners (from main customer Dyson), which is said to have begun operations in October. Analysts are also projecting more contracts from Dyson going forward.

Conclusion

Looking ahead, improvement in margins are also likely for VS, given that its Indonesian operations has successfully made a turnaround in FY16 while its China operations  would have also turned in a positive profit before tax if not for the impairment  charges.

That said, risks that investors should look out for includes forex risk (given that most products are exported) as well as customer concentration risk (top three customers accounted for 58 percent of the firm’s FY16 revenue).

With new contracts driving growth for FY17, consensus on the streets has given VS’ stock an equivalent of a ‘Buy’ rating, with average target price of RM1.66 versus 9 November’s close price of RM1.40.

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