Investment Highlights

• We maintain HOLD recommendation on V.S. Industry (VSI) with an unchanged fair value (FV) of RM0.90/share, based on CY24F target PE of 15x (Exhibit 2), at parity to its 5-year forward average. We made no adjustment to our neutral 3- star ESG rating.

• VSI’s FY23 core net profit of RM209mil generally came in within our expectation, just 2% below our forecast albeit 16% above street estimate.

• We believe the deviation from street’s was primarily due to a lumpy non-recurring RM19.8mil forex loss in 2QFY23, which has been excluded from our core earnings calculation.

• Hence, we maintain FY24F-25F earnings while introducing FY26F net profit with a 7% YoY growth, underpinned by continuous new product launches by customers and growing consumer electronics demand.

• The group declared a dividend of 1.0 sen/share in 4QFY23, bringing FY23 total dividends to 2.2 sen/share, which implies a payout of 41% that is within our expectation despite being lower than 44%-49% in pre-pandemic FY18- FY19.

• On a YoY basis, VSI’s 4QFY23 revenue increased by 16% to RM1.2bil, primarily due to higher sales orders driven by new product launches by a customer and coffee brewer in USA, alongside continuous production ramp-up following the arrival of additional migrant workers.

• However, 4QFY23 core earnings decreased by 11% YoY to RM73mil, primarily due to higher electricity surcharges and labour costs, resulting in a 2.5ppt YoY decrease in gross profit margin (GPM) to 10.5%. In addition, the group’s financing expenses surged 2.7x YoY due to the issuance of RM500mil debt securities under the Sukuk Wakalah programme in Sep 2022.

• On a QoQ basis, VSI’s 4QFY23 revenue increased by 17%, mainly due to seasonally stronger quarter together with new product launches.

• Consequently, the group’s 4QFY23 core earnings surged by 2.7x QoQ. The relatively stronger growth in earnings was driven by lower operating costs and overheads following higher utilisation of its production lines. This raised GPM by 2.6ppt QoQ.

• Barring any unforeseen circumstances, sales are expected to continue to improve gradually in FY24F, driven by new model launches by customers (including a USA-based customer and coffee brewer) and restocking of inventories. 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 improved plant utilisation rates.

• Even so, with the stock trading at CY24F PE of 17x, 13% above its 5-year average of 15x with a mild dividend yield of 2%, we see limited upside potential.

Source: AmInvest Research - 27 Sept 2023