V.S Industries- World Top Electronic Manufacturing Service Provider - PART 2

V.S Industries is enjoying a growing electronic manufacturing services (EMS) market due to the increasingly outsourcing of those multinational company to their partner in southeast Asia. This trend is an great opportunity for V.S to increase their market share. In an interview with TheEdge, V.S managing director, Datuk Gan Sem Yam stated that " For a company that provides supply-chain services and fully integrated contract manufacturing services to companies such as Panasonic, Sony, Canon, Mitsubishi, Kenwood and Dyson, V.S has yet to reach its full potential."

Business Risk

1) One of the factors that drives on V.S profit growth is the growing demand of consumer electronic products, and the switching trend to outsource the manufacturing services to southeast Asia companies. With that, the consumer spending power might determine the performance of V.S. The possibility of European countries revival will keep the demand growing. However, if the economic is not doing good or remain uncertainty, consumers will delay their consumption which directly affect the orders for EMS providers.

2) As an EMS provider, V.S had to allocate some portion of money as capital expenditure (CAPEX) to cope with the growing of technology in order to remain innovative and competitive enough in EMS industry. Besides that, V.S has to spend to increase their capacity.In annual report 2013, V.S states that extensive research and development will be carried out with their key customers to meet the evolving trend of the industry. V.S aims to establish higher-value added manufacturing processes in their operation while keeping the cost at an optimized level. Due to the high CAPEX consumption, we can see that free cash flow generated by V.S is not consistent.

If V.S does not spend on CAPEX, they will not able to cope with the rapidly growth of technology and hence, left behind of their competitors. Its business nature is quite capital extensive i would say.


Management

As when we discuss about the management of a company, i would like to take a look on its dividend payout. With the growing of earning per share, the management are being generous. The total amount of dividend payout are increasing year on year except for year 2013. V.S has a solid dividend payout history, and never did any cash call after its listing. Besides dividend, the company had been doing share buyback very often.

Share buy back is a very positive sign for me. It signifies that the share are cheap and having good potential in future. It is an alternative way to compensate shareholders besides dividend. On top of that, the management are confident on the company prospect.

As you can see from the table above, the directors of the company are holding substantial amount of shares. It is a good sign for me too as the management will try to do their best as to maximize the wealth of shareholders. Inabata & Co. Ltd held 10.34% of indirect stake on V.S Industries. Inabata emerges as the shareholder of V.S since 2006 and had been accumulating the shares. Inabata is the supplier of resin for V.S and i believe this relationship will create better synergies.

Valuation

Since 2010 to 2013, Price/earning ratio had been standing at the range of 5.2 to 10.2. If we are calculating the PE ratio with last 4 quarters EPS, the PE ratio we get is around 5.4, which is at the bottom of range. Having considered at its business risk, and looking on its future prospect, i will still think that the current valuation is rather cheap.Besides that, V.S is trading below its book value.


Conclusion

In short, I would think that V.S industry is involving in an unexciting industry as the CAPEX requirement is high, but somehow the management is capable enough to grow the company. The business will continue to remain tough, added by the implementation of minimum wages and others expenses hike. V.S is currently trading at market capitalization of around 274 Million. It  is a company that provides manufacturing services to big multinational companies like, Dyson, Sony, Panasonic, etc, doing business in a tough industry but the managements able to grow the business, been actively buying back its own shares, and trading at cheap valuation. If the macroeconomic factors turn in favor of V.S and the switching trend of EMS to southeast Asia persists, i have a gut feeling that the market cap might be doubled at least.