VS (6963) - VS Industry Berhad - Firmly On Track

VS Industry had its quarterly meet-up with the investment community yesterday to provide updates on current developments and its recent 3QFY17 results. The meeting this time round however also included a presentation made by the Executive Chairman of Seeing Machines Ltd, a 12%-owned investee company. Key take-away from the meeting is that the Group remains firmly on track to achieve robust earnings growth in the coming financial years, underpinned by increasing orders by its key customers. Our Outperform call is reaffirmed with target price unchanged at RM2.36 based on 16x fully-diluted CY18 EPS.

• On Malaysia… Two box-build assembly lines are already running at optimal capacity for a particular significant customer, with more to come on stream in the coming months to meet rising demand. Current facilities are able to run up to 6 assembly lines for this one customer. A new warehouse cum production facility (with potential to run another 6 lines) is currently being built to further expand its box-build capacity. Overall plant utilization is currently at c.80%, up from c.68% end-FY16. Forthcoming production scale-ups will see further improvements in margins from greater economies of scale.

• On China... Overall plant utilization is now at 60% since the commencement of production for Perfect China. Management is still in the midst of negotiating for a replenishment of orders, and indications continue to remain positive. 20%-owned NEP Holdings will become a key contributor FYF18 onwards as it has committed to award all new manufacturing orders to VS, including the supply contract for the Haier Group. To recap, NEP has a 5-year product sales agreement with a subsidiary of Haier where it supplies products to Haier and the latter distributes them through its 40,000 strong local retail network.

• NEP Holdings. On a separate note, Ozner Water International Holding Ltd, a HK-listed company with a market capitalization of HKD3.4bn has proposed to acquire a 51% stake in NEP Holdings from current owner and founder Lim Chang Huat for RM296.8m in cash. While management is undecided on its next course of action, it does have the option to either remain as a shareholder (though it is uncertain if the manufacturing commitment will still hold) or tag along in the transaction and sell any or all of its shareholding in NEP at the same valuation, pocketing a tidy RM56.4m gain on its RM60m investment should it opt for the latter.

• Seeing Machines Ltd. A pioneer in the development and commercialization of computer vision algorithms, processors and systems that enable machines to see and understand people, prospects are promising though monetary benefits will not be as immediately forthcoming. Primary application to date is Driver Monitoring Systems which monitors and mitigates driver drowsiness and distraction which reduces accidents, cut costs, protects assets and saves lives. Listed on the AIMS Market in London since 2005, financial breakeven is only anticipated mid-2018. Two other companies in a similar space are SensoMotoric Instruments and Eyefluence, recently acquired by Apple and Google respectively, though price tags are unknown. VS’s investment cost is USD12m, though it has also taken an RM7.6m impairment charge in 4QFY16.

VS (6963) - VS Industry Berhad - Firmly On Track

Source: PublicInvest Research - 5 Jul 2017


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