Investment Highlights

• We maintain our HOLD recommendation on V.S. Industry (VSI) with a lower fair value of RM0.80/share (from RM0.85/share previously) based on CY23F target PE of 15x (Exhibit 3), at parity to its 5-year forward average. We made no adjustment to our neutral 3- star ESG rating.

• VSI’s 9MFY23 core net profit of RM135mil generally came in below expectations, accounting for 59% of our earlier FY23F forecast and 67% of the street’s estimates. Notably, we have excluded the lumpy RM19.8mil forex loss in 2QFY23 from our core earnings calculation.

• The deviation to our forecast was mainly due to lowerthan-expected GPM amid the increase in operating expenses. Hence, we trim our FY23F-FY25F earnings by 7%/7%/8%.

• The group declared a 3rd interim dividend of 0.4 sen/share in 3QFY23, bringing that total dividend for 9MFY23 to 1.2 sen/share (implying a payout of 34% vs 44%-49% in prepandemic period).

• The dividend payout falls short of our expectation, accounting for only 50% of our FY23 DPS estimate of 2.4 sen/share (vs 68%-69% during pre-pandemic). Hence, we revised our FY23 DPS projection to 1.8 sen/share with a lower payout assumption of 40% from 50% previously.

• As for now, we maintain our DPS assumptions for FY24F- 25F pending management guidance on dividend payout in next Monday’s result briefing.

• On a YoY basis, VSI’s 3QFY23 revenue increased by 8% to RM997mil, primarily due to higher sales orders from key customers in Malaysia, alongside with the continuous production ramp-up following the arrival of additional migrant workers.

• However, 3QFY23 core earnings halved to RM27mil primarily due to higher electricity surcharges and labour costs. Furthermore, the group’s financing costs have increased by 2.4x YoY, as a result of the issuance of RM500mil debt securities under the Sukuk Wakalah programme in Sep 2022.

• On a QoQ basis, VSI’s 3QFY23 revenue decreased by 13%, mainly due to lower sales orders. Notably, VSI’s revenue has been declining since 1QFY23.

• Consequently, the group 3QFY23 core earnings declined by 47% QoQ. The earnings were further dampened by higher operating costs and higher overheads following under-utilisation of its production lines. This brought the GPM lower by 2ppt QoQ.

• Nevertheless, barring any unforeseen circumstances, sales are expected to gradually improve starting from FY24F, driven by new model launches by its customers (such as US-based Customer and Coffee Brewer) and the restocking of inventories by clients. Most of the customers have delayed new model launches since 2022 due to the challenging macroeconomic environment.

• Meanwhile, one of its key customers has been gradually reducing its reliance on China, which could translate into more orders for VSI and an improvement in utilisation rates of plant capacity.

• With the stock trading at FY24F PE of 17.5x, 17% above its 5-year average of 15x, we see limited upside potential.

Source: AmInvest Research - 16 Jun 2023