Investment Highlights

• We maintain HOLD recommendation on V.S. Industry (VSI) with a higher fair value of RM0.82/share (from RM0.80/share previously) due to higher earnings expectations albeit an unchanged 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.

• After yesterday result briefing, we raised FY23F-FY25F earnings forecasts by 1%/6%/6% to account for a rebound in demand from VSI’s largest customer.

• We gathered that orders from clients generally remained intact, with Customer X (VSI’s largest customer by revenue in 9MFY23) signalling a rebound in demand in its most recent guidance to VSI.

• Hence, barring unforeseen circumstances, revenue and net profit are expected to gradually improve starting from 4QFY23F, further boosted by new model launches by a customer and coffee brewer in US. Notably, most of the customers have delayed new model launches since 2022 due to the challenging macroeconomic environment.

• On top of that, the group is also in the midst of enhancing its value chain by incorporating some in-house processes which were previously outsourced. This is expected to be an earnings-accretive exercise and could be reflected in VSI’s bottom line by FY24F. The capex requirement for this exercise is estimated at RM40mil.

• Meanwhile, Customer Y 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.

• Separately, VSI reported yesterday that the group has recently secured a potential customer and is currently in preproduction phase i.e., producing samples for the customer’s review prior to order finalisation.

• The customer is a US-based multinational corporation that supplies consumer electronics. The gross profit margin (GPM) of the products that VSI supplies to the customer could exceed the group’s 9MFY23 GPM of 9%-10%.

• Although contribution is expected in 1Q-2QFY24F, we have not factored in this development in FY24F-25F revenue, pending an official announcement.

• With the stock trading at FY24F PE of 16.3x, 9% above its 5- year average of 15x, we see limited upside potential.

Source: AmInvest Research - 20 Jun 2023