Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with an unchanged fair value of RM1.27/share, derived from FY23F target PE of 16x (Exhibit 4), +1SD of VSI 5-year forward average. We made no adjustment to our earnings forecasts and neutral 3-star ESG rating.

• Our FY23F-FY24F earnings, are maintained as we have already incorporated a 23% revenue surge in FY23F from robust orders from a key customer amid alleviating supply chain disruptions and labour constraints. We note that our FY23F core earnings are currently 18% above consensus.

• Even so, VSI’s FY22 core earnings of RM215mil (-22% YoY) exceeded expectations, registering 15% above our estimate and 14% higher than consensus. The positive variance is mainly attributed to stronger-than-expected gross margin expansion in 4QFY22.

• For our core net profit calculation, we exclude i) loss on disposal of property, plant and equipment of RM7.4mil, ii) plant and equipment impairment loss of RM12.4mil, and iii) investment in associates impairment loss of RM25.8mil.

• The group declared an interim dividend of 0.8 sen/share, bringing the cumulative FY22 dividend to 2 sen/share, in line with our expectations.

• The group’s 4QFY22 gross margin expanded 3%-points QoQ to 13%, likely due to the gradual production ramp-up following the arrival of additional migrant workers. In tandem with the pickup in production, VSI’s revenue grew 8% QoQ to RM1,004mil. The twin effect of stronger revenue and gross margin expansion boosted the group’s 4QFY22 core earnings by 62% QoQ and 18% YoY to RM82mil.

• The lower FY22 earnings compared to the same period last year is due to sub-optimal production levels for a key customer, coupled with higher labour and raw material costs in 1HFY22.

• Moving forward, we expect the group’s earnings recovery trajectory will continue in FY23F following the alleviation of the labour shortages and supply chain disruptions. The robust orders from Customer Y are expected to help offset potentially weaker demand from mid-tier customers due to prospects of a global economic slowdown.

• The stock is currently trading at a FY23F PE of 13x, below its 5-year peak of over 18x. Given our expectation of an earnings resurgence in FY23F, we believe this is unjustified.

Source: AmInvest Research - 28 Sept 2022