This article first appeared in The Edge Financial Daily on September 18, 2017 - September 24, 2017

VS Industry Bhd
(Sep 15, RM2.60)
Maintain buy with a higher target price of RM2.86: VS Industry Bhd will announce its fourth quarter financial year 2017 (4QFY17) results on Sept 27. As guided by the management earlier during the 3QFY17 results briefing on July 4, we envisage the group’s upcoming 4QFY17 to soften as affected by unfavourable foreign exchange (forex) movement.

We expect VS Industry to register lower core earnings of RM35 million to RM45 million for 4QFY17, which tumbled 11%-31% quarter-on-quarter (q-o-q) but soared fourfold to fivefold year-on-year (y-o-y). We believe the weaker q-o-q results are mainly due to unfavourable forex movement which has eroded the group’s gross margin pursuant to higher raw material costs. The stronger y-o-y results are mainly attributable to a relatively low base in 4QFY16 as that quarter was affected by impairment losses on Seeing Machines Ltd and deposit in Inner Mongolia. For the full year, we believe the group could achieve core earnings of RM150 million to RM160 million (+36%-45% y-o-y).

We gather that VS Industry has recently renegotiated the terms with its key customer with orders that are now being denominated in ringgit instead of US dollar as previously. This helps mitigate the impact of fluctuations in currency on its sales value. Furthermore, the group’s cost plus pricing allows VS Industry to have flexibility in passing the direct material cost (mainly of plastic/resin), and labour (6,000 foreign workers) and overhead costs to the client.

The group has secured some new orders from its existing key customer. The new product will commence operations in November whilst the new model of its existing product will commence operations next month and in November this year. Production could take three to four months to reach optimal capacity. Thus, full earnings impact will be felt in FY19 for all the box-build assembly lines. Besides, VS Industry is in the midst of exploring other new business opportunities with a renowned customer in Europe/US. Should the deal materialise (expected in 2019), it will receive a sizeable order which will require the group to incur heavy capital expenditure on new machinery and plants. Meanwhile, we expect the group to receive more orders from Keurig as it starts to supply to the Asian region early next year with an anticipated strong demand on its original design manufacturing  model besides the current supply to the US and Europe. — JF Apex Research, Sept 13