Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with a lower fair value of RM1.05/share (vs.RM1.27/share previously) based on an unchanged FY23F PE of 16x (Exhibit 4). This is near to VSI’s 5-year forward average PE of 15.7x. We make no adjustments to VSI’s 3-star ESG rating.

• VSI’s 1QFY23 core earnings of RM59mil (-28% QoQ, +43% YoY) fell short of our expectations as it accounted for only 18% of our full-year FY23F forecast. The results were within consensus estimates.

• Despite the sequential revenue improvement in 1QFY23, the quantum of the recovery was slower than our expectations. For comparison purpose, 1Q contributed 28%-26% of the group’s full-year revenue during the pre-pandemic period of FY18-FY19.

• Therefore, we revise our FY23F/FY24F/FY25F earnings lower by 19%/10%/3% to reflect a more conservative sales assumption and gradual gross margin recovery. VSI declared an interim dividend of 0.5 sen/share, which was in line with our expectations.

• The group’s revenue grew 29% sequentially in 1QFY23, supported by the continuous production ramp-up following the arrival of additional migrant workers. However due to the group’s accounting conservatism practices, EBIT margin shrank 2.4-ppt QoQ. This is expected to normalise in 4QFY23. VSI tends to over-provide its costs in the first 3Q of the financial year and then reverse them in the final quarter.

• YoY basis, the company’s earnings grew 43% in 1QFY23. Recall that last year, VSI was affected by sub-optimal production levels for a key customer and higher labour and raw material costs.

• Moving forward, we expect the group’s earnings trajectory to continue in the remaining quarters of FY23F on the back of improvements in labour shortages and supply chain disruptions. Also, robust orders from Customer Y are expected to help offset weaker demand from mid-tier customers.

• The stock is currently trading at a FY23F PE of 16x, below its 5-year peak of over 18x. We believe that this is unjustified as VSI’s earnings are expected to recover.

Source: AmInvest Research - 19 Dec 2022