Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with a lower fair value of RM1.61/share (previously RM1.98/share), pegged to an unchanged 20x FY23F PE. We made no adjustment to our 3-star ESG rating (Exhibit 5).

• In view of the uncertainties arising from ongoing supply chain disruptions and some housekeeping adjustment, we have reduced our revenue growth assumption, lowering core earnings forecasts by 29% for FY22F, 20% for FY23F and 23% for FY24F.

• VSI’s 1QFY22 core earnings were below expectations, accounting for 10% of our FY22F net profit and 11% of consensus. This stemmed from lower orders for printed circuits board assembly (PCBA) from key customers, coupled with continuous disruptions on component supply in Malaysia. These slashed the group’s 1QFY22 core earnings by 43.3% QoQ and 47.3% YoY to RM35mil.

• 1QFY22 core profit margin fell to 4% (compared to previous quarter 7%), partially due to diseconomies of scale arising from lower orders booked from key customers.

• Zooming in on its Malaysian operation, VSI’s PBT was affected by rising labour and raw materials costs, higher depreciation from new facilities and vaccination costs for its entire workforce.

• While the group managed to secure a new key customer, production has yet to achieve optimal level, resulting in lower operational efficiency. Coupled with the disruptions in supply chain, this cut 1QFY22 PBT margin to 5.2% from 9% in 1QFY21.

• As for its Indonesian segment, the group’s 1QFY22 revenue increased 16% YoY to RM79mil from higher sales orders from a key customer, propelling PBT to RM2.1mil from just RM0.5mil in 1QFY21.

• Meanwhile, the China-based operation continues to remain underutilised in the absence of robust sales order due to the competitive landscape in the region. VSI remains focused on cost optimisation and streamlining initiatives to narrow losses.

• Looking forward, the group acknowledges the challenges in the EMS industry brought about by the Covid-19 pandemic and geopolitical uncertainties. The disruption in global supply chain has led to longer lead times and component shortages have driven up raw materials costs. Nonetheless, the group remains optimistic and is in active discussions with key customers on potential new orders. On the labour front, the group is stepping up the hiring of more locals following the ban on bringing in foreign workers since last year. We expect to gain more clarity on the group’s FY22F outlook at VSI’s upcoming conference call.

• We remain positive on VSI’s longer-term outlook, underpinned by its: (i) ability to offer turnkey electronic manufacturing services solutions as a vertically integrated player; (ii) customer diversification efforts with opportunities arising from the US-China trade war diversion; and (iii) improving overseas operations underpinned by higher sales order from its Indonesian segment as well as improving cost rationalization initiatives in China.

Source: AmInvest Research - 17 Dec 2021