Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with an unchanged fair value of RM1.27/share, pegged to an unchanged 16x FY23F PE. Our target PE represents 1 standard deviation above VSI’s 3-year average forward PE. We make no adjustment to our neutral 3-star ESG rating (Exhibit 3).

• Our forecasts are unchanged pending the release of 9MFY22 results this Friday. While we opine that 3QFY22 results will continue to be soft due to delays in labour recruitment, the group should be able to ramp up its production in 4QFY22 with an improvement in the worker shortage situation.

• The return of migrant workers has been slow despite the easing of cross-border restrictions. However, we gather that VSI has brought in 1,100 workers from Myanmar since late May this year. The group aims to recruit additional 2,300 workers, which will be joining in phases by August 2022.

• We anticipate a spike in FY22F recruitment expenses of RM10mil with additional RM5mil in 1QFY23. However, we make no adjustment to core profit for now pending the upcoming results.

• The group’s new hostel, which could house additional 1,800 workers, was completed this month. The timely completion of this new hostel should enable the group recruit additional workforce without major ESG concerns in terms employees’ living condition. In addition, we anticipate further updates on the independent review of its labour practices conducted by PwC Consulting by end-June. Recall that the review commenced on 3 Mar 2022 and is expected to complete within 4 months.

• While we are upbeat on the improving labour situation, we remain cautious on other challenges brought about by the Covid-19 pandemic and Russia-Ukraine conflict. These include persistent supply chain disruptions and stagflationary outlook, leading to lower demand for discretionary goods.

• Nonetheless, 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 rationalisation initiatives in China; and
  (iii) ongoing commitment to better ESG standards,

particularly on Improving Employ

Source: AmInvest Research - 22 Jun 2022