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Reaping The Fruits Of Trade-Diversion-Related Orders

Order commitment from key customers remains intact with some making VSI the preferred partner in Asia by loading up massive volumes. Despite the five new wins since early-19, the group still has appetite for new contracts, with discussions at different stages. VSI is reaping the fruits of the trade-diversion-related orders and offering two-year net profit CAGR of 26% even from its peak year. Maintain BUY with an unchanged target price of RM1.86.

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WHAT’S NEW

• Growth trajectory from its US-based floorcare customer remains intact. Visibility from this key customer remains intact and it is making VS Industry (VSI) its preferred partner in tandem with its new regional base setup in Malaysia. The group is manufacturing seven models for its new US customer, with another one model to start production in Oct 21. Meanwhile, the timeline for the last model (totalling nine models) budgeted by the group has not been confirmed. We believe VSI could achieve revenue of RM1.2b in orders FY22 (from c.RM750m in FY21) assuming there are no further restrictions on labour hiring. We believe these trade-diversion-related contracts could be lucrative with gross margin of not less than 12.0%, which partially contributed to its record-high margin of 6.8% this quarter.

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• Updates from other key customers. Management expects its coffee brewer and pool cleaning customers to maintain its good growth trajectory despite the quarterly seasonality. This comes as the group has been selected as the preferred second source for trade diversion. For Victory, we expect orders to be muted, following the expectations of fewer COVID-19 cases. We have incorporated a much lower sales forecast of <RM200m for this contract in FY22. Meanwhile for the latest customer acquisition (customer Y) which was announced in Oct 20, the production for one new model has commenced and meaningful
sales are expected to start contributing in FY22. Recall that the group has acquired six pieces of land with industrial buildings for RM98.8m to partly cater for its manufacturing jobs.

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• Defying the myth of unfavourable order awards. Despite the lower battery pack jobs which are natural attrition following its peers’ vertical integration, the new printed circuit board assembly (PCBA)/battery and full assembly jobs secured in Aug 20 are expected to contribute consistently for FY22. These were for beauty-line products and motorised housing products. While the new contract size was not as big as the two latest key wins from its US customers, this order is a testament to the customer’s trust in: a) the group’s state-of-the-art manufacturing capabilities, and b) good business track record. Meanwhile, VSI has not secured any additional turnkey contract.