VS Industry undervalued, says Kenanga Research

by **Cals** Tue 07 Jan 2014, 18:36

Business & Markets 2014

Written by Zatil Husna of theedgemalaysia.com

Tuesday, 07 January 2014 15:33

KUALA LUMPUR (Jan 7): Kenanga Research believes that V.S Industry Bhd (VSI), an electronics manufacturing services (EMS) provider is undervalued, as the company has remained profitable since its listing in 1998.

In a note today, the research house said that the EMS provider for office equipments and household appliances may be a “hidden gem” due to its portfolio.

“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,” said the research house.

For the first quarter for financial year 2014 (1QFY14), VSI’s net profit increased 25% year-on-year (y-o-y) to RM9.6 million, which beats consensus FY14 net profit 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,” Kenanga said.

Recently, VSI has allocated capex of RM20 million 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 4QFY14.

This is 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% y-o-y albeit a slightly lower NP margin assumption of 2.6%,” the research house said.

The research house believes that VSI can maintain the underlying dividend payout track records of at least 40%, despite the higher net gearing of 0.6 times due to VSI’s acquisition to turn it into a subsidiary from associate.

VSI is a leading EMS provider in the region that offers supply-chain services and fully integrated contract manufacturing services to companies with world renowned brand names from Europe and Japan.

The company started in 1979 by founder-chairman Beh Kim Ling. Today, the group has manufacturing facilities in Malaysia, China, Indonesia and Vietnam.

The company is listed as one of the top 50 contract manufacturers in the region, the group’s range of customers comprise of renowned electronics players such as Panasonic, Sony, Canon, Mitsubishi, Kenwood, Dyson and many others.