Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with a lower fair value of RM1.27/share (previously RM1.61/share), pegged to a lower 16x FY23F PE (previously 20x FY23F PE). The revised PE is based on 1 standard deviation above VSI’s 3-year average forward PE. We make no adjustment to our neutral 3-star ESG rating (Exhibit 5).

• In view of rising raw material and labour costs that are further exacerbated by the newly imposed minimum wage of RM1,500 effective 1 May 2022, we have lowered FY22F gross profit margin assumption by 1.5% points. This cut our earnings forecast by 22% to RM187.5mil.

• We maintain FY23F–FY24F earnings on the assumption that VSI will be able to pass on the higher labour cost in 6 months’ time, which occurred after the last minimum wage hike in 2020.

• VSI’s 1HFY22 core earnings of RM76mil, excluding net forex gain, were below expectations, accounting for only 32% of our FY22F projection and 28% of consensus. This is primarily due to lower orders for its printed circuit board assembly (PCBA) from key customers, coupled with continuous disruptions on component supply in Malaysia.

• Core profit margin fell to 3.8% in 1HFY22 from 6.8% in 1HFY21, due to higher raw material/labour costs and depreciation charges together with sub-optimal production levels for a key new customer. Operational inefficiencies deteriorated further due to supply shortages.

• QoQ, the group’s 2QFY22 profit before tax increased by 7.5% in the absence of one-off set-up costs for the industrial vaccination centre (PPVIN) and employee vaccinations. Excluding these costs, VSI’s core profit remained flattish.

• 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, driving 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 has appointed PwC Consulting to conduct independent third-party review of its entire workforce, aiming to address any gaps in its labour practices.

• 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) improving overseas operations supported by higher sales orders from its Indonesian segment as well as better cost rationalization initiatives in China; and (iii) ongoing commitment to better ESG standards, particularly on improving employees’ welfare

Source: AmInvest Research - 28 Mar 2022