Investment Highlights

• We maintain our BUY recommendation, forecasts and fair value (FV) of RM1.61/share for V.S. Industry (VSI), pegged to an unchanged FY23F PE. We made no adjustment to our 3-star ESG rating (Exhibit 3).

• Key takeaways from VSI 1QFY22 conference call:
  • Results summary: VSI’s 1QFY22 core earnings of RM37.9mil, which excludes foreign exchange gain and one-off set up costs (RM3mil) for the Industrial Vaccination Centre (PPVIN), fell 43.6% QoQ. This primarily stems from lower orders for printed circuits board assembly (PCBA) from key customer, coupled with continuous disruptions on component supply in Malaysia.
  • Production capacity: Production for existing orders continued to run at full capacity, limited by labour shortages. However, with the gradual easing of cross-border restrictions, VSI expects to be able to commit to more orders. VSI is targeting to bring in 3,000 additional workers to current 9,000 workforce.
  • Victory cancelled: The group has officially announced the cancellation of Victory’s contract to manufacture and supply cordless electrostatic sprayers. This is expected to reduce our revenue forecast by RM800mil to RM1bil for FY22F-FY24F.
  • Silver lining: While the cancellation Victory’s contract came out as a surprise, management guided that the capacity that was previously reserved for Victory is now planned for new orders from Customer X. Production for the new orders is slated to start on 3QFY22, which we expect to be fully ramped up over 6 months.
  • In addition, the group expects its new customer (Customer Y) to ramp up orders in 3QFY22, contributing a total RM400mil in this financial year. All in, VSI has allocated capacity which could generate sales of up to RM1.5bil for Customer Y.
  • Capex: VSI has allocated RM150mil for FY22F, including RM30mil for new hostel construction and the recent RM30mil acquisition of 8.9 acres of land in Senai, Johor in Nov 2021. The land is strategically located within the proximity of existing i-Park facilities and will be reserved for future production. VSI has yet to identify any customers at this juncture.
• Outlook: 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 time and component shortage has led to rising raw material costs. Nonetheless, the group has partly mitigated the risk by maintaining a high buffer of finished goods inventory and keeps close contact with suppliers for raw material. On the labor front, the group is stepping up of the hiring of more locals following the ban on bringing in foreign workers since last year.

• 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 rationalisation initiatives in China.

Source: AmInvest Research - 20 Dec 2021