VSI rally supported by strong earnings visibility
PETALING JAYA: V.S. Industry Bhd’s (VSI) share price rally is supported by strong earnings visibility in the coming quarters, said AmInvestment Bank (AB) Research.
This is following the ramp-up in orders for a “customer X” and notably, a convincing turnaround of its China operations.
“Opportunities for higher boxbuild orders from ‘customer X ‘would provide fresh catalyst for earnings upgrade.
“Its share price has risen 12% since our initiation end-January 2017, yet we think the rally still has legs,” AB Research said in its report yesterday.
The research house has maintained its “buy” call on VSI with a higher sum-of-parts based target price of RM1.90.
This is premised on higher target price-to-earnings ratio of 13 times (from 12 times) on forecast earnings per share for financial year 2018 (FY18) to reflect its better growth prospects, going forward.
AB Research said the premium valuation over its peers is justified by its higher earnings compounded annual growth rate of 24% (versus peers’ average of 12.8%) and earnings revision of +2% for FY18 forecast, as it tweaks its boxbuild sales volume assumption higher by 7%.
“We expect VSI’s upcoming second-quarter core profit to be stronger year-on-year, mainly driven by higher revenue contribution from ‘customer X’ and China.
“On a sequential basis, we think core profit should be rather flattish as the higher contribution from the mentioned customers would be offset by seasonally weaker orders from Keurig after peak delivery in the fourth quarter and first quarter of FY17 for the holiday seasons,” the report said.
The research house also noted that VSI’s 43.6%-owned subsidiary VS International Group (VSIG) has recently announced that it is expected to record 10 times increase in net profit for the first half of FY17.
“This suggests that China operations have turned a corner in the second quarter of FY17 (first quarter FY17: pre-tax loss of RM4.9mil).
“And based on our back-of– the-envelope estimates, this would translate to about RM3mil in net profit to VSI in the first half of FY17,” AB Research said.