Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with an unchanged fair value of RM1.05/share, derived from FY23F target PE of 16x (Exhibit 3), near its 5- year forward average of 15.7x. We made no adjustment to our earnings forecasts and neutral 3-star ESG rating.

• As the supply chain disruption and labour shortage issues have been fully resolved, the utilisation rate of VSI’s plants will determine whether our FY23F net profit margin of 5.9% is achievable.

• We gathered that the orders from its clients generally remain intact – the higher sales from Customer X are expected to cushion any potential weakness of orders from other clients.

• More new models are expected to be launched by VSI’s customers in 2023, slanted towards 2HCY23, as most of them delayed launches due to the challenges in 2022.

• Coupled with customers stocking up inventories following expectations of gradual macroeconomic improvements, demand for VSI’s services is likely to remain stable for 2023.

• Customer Y’s supply chain consolidation activity recently could potentially benefit VSI. The customer has cut its number of suppliers to 4 (from 6), to reduce its reliance on China, which could translate into more orders for VSI and an improvement in utilisation rates.

• On the potential increase of electricity tariff, the impact is expected to be minimal given that electricity cost contributes less than 5% of the group’s cost of sales. Recall that the government previously indicated a potential increase in electricity tariffs for multinational exporters to reduce the financial burden of subsidies.

• Separately, VSI has raised RM500mil through a Sukuk Wakalah programme, as part of the company’s risk management measures should the global economic slowdown come out worse than expected. The proceeds will be utilised mainly for working capital and capital expenditures. This increases the group’s net gearing to 0.18x in 1QFY23 from 0.14x in 4QFY22.

• The stock is currently trading at a FY23F PE of 15.3x, below its 5-year peak of over 18x. We believe this is unjustified given our expectations of an earnings recovery moving forward.

• Key risks to our call and earnings forecasts are deeper-than-expected global recession and VSI losing its key customers.

Source: AmInvest Research - 6 Jan 2023