Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with a lower fair value of RM0.85/share (from RM0.90/share), derived a from revised CY23F EPS with an unchanged target PE of 16x (Exhibit 3), based on its 5-year forward average. We made no adjustment to our neutral 3- star ESG rating.

• We cut FY23F-FY25F earnings forecasts by 6%-7% to reflect further delays in sales recovery following the deterioration of broad consumer sentiment, which is also mirrored in the company’s rolling forward orders.

• We gathered that orders from clients generally remain intact except Customer X, which saw a downward revision. This likely will be reflected in the company’s upcoming quarter net profit which is expected to be sequentially lower.

• Besides lower sales orders, the margin is likely to deteriorate with the decline in operating leverage. Recall that the company onboarded more than 3,000 new foreign workers last year with the expectation of a sharp sales recovery. However, given the under-utilisation of its production lines, the additional overhead expenses are turning into sunk costs with relatively minimal increment in productivity.

• Nevertheless, barring any unforeseen circumstances, sales are expected to gradually improve starting from 4QFY23, driven by new model launches by its customers (such as US-based Customer and Coffee Brewer) and restocking of inventories. Most of them have delayed new model launches since 2022 due to the challenging macroeconomic environment then.

• On top of that, the company is also in the midst of enhancing its value chain by bringing in-house some of the previously outsourced processes. This is expected to be an earnings accretive exercise and could be reflected in the company’s bottom line as soon as FY24F. The capex requirement for this exercise is estimated at RM40mil (vs. RM80mil full-year capex guidance).

• The stock’s valuation looks unattractive, currently trading at CY23F PE of 15.6x, in line with its 5-year forward average of 16x.

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

Source: AmInvest Research - 30 Mar 2023