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 1), at parity to its 5-year forward average. We made no adjustment to our neutral 3- star ESG rating.

• After a recent analyst briefing, we maintain FY24F-26F earnings with these salient highlights:

• We gathered that FY24F revenue growth will be mainly driven by new model launches by a USA-based customer together with a coffee brewer and pool cleaner, as well as gradual increase in orders from Customer Y who is slowly reducing its reliance on China-based manufacturers.

• FY24F core PATAMI margin should be slightly higher than 4.5% in FY23, driven by continuous incorporation of some in-house processes which were previously outsourced and higher plant utilisation. Hence, we assume a 0.2ppt YoY improvement to 4.7% in FY24F.

• In May 2023, VSI acquired a 40% equity stake in HT Press Work (HTPW) for RM6.4mil cash via capital injection. In Sep 2023, VSI acquired an additional 11% equity stake for RM2.6mil cash from existing shareholders, raising its equity stake in HTPW to a controlling 51%.

• HTPW is a Malaysian company incorporated in 1995 that specialises in the business of metal stamping, tools and die design/fabrication, machining, as well as anodising and surface finishing of aluminium products.

• According to the terms of the share sale agreement in Sep 2023, VSI will pay an additional RM2.6mil for the 11% equity stake acquisition if HTPW achieves PAT target of RM20mil (excluding non-operating gains or losses) for any Dec-ended FY before 31 Dec 2025.

• HTPW delivered a loss of RM1.3mil in FY22 and RM0.9mil in FY21 with a slight profit of RM1.5mil in FY20. HTPW's deteriorating PAT performance was primarily attributable to obsolete production lines and noncompliance with global labour laws.

• VSI plans to realise HTPW’s full potential by (a) purchasing and constructing a new production line for a newly secured US-based multinational corporation (MNC), (b) improving working conditions for employees, and (c) collaborating with HTPW to obtain potential orders of up to RM100mil (2% of VSI’s FY24F revenue) from the MNC.

• This US-based MNC is the new customer which management has mentioned in previous briefings. To recap, the group supplies consumer electronics and could generate orders with gross profit margin exceeding the VSI’s FY23 GPM of 9%-10%. VSI together with HPTW have sent samples for the customer's evaluation and get approved, so they will begin mass production in Nov 2023 (2QFY24F).

• Nevertheless, VSI guided that the realisation of RM100mil order will depend on the rejection rate during mass production starting in Nov 2023. Hence, we have not yet factored in our FY24F-26F revenue.

• For other new customers, VSI has been in active negotiations, albeit without any clarity for now.

• All in, FY24F core earnings are expected to continue to improve, driven by new model launches by existing clientele, customer Y’s multi-shoring strategy from China and incorporation of in-house processes which were previously outsourced.

• 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 - 29 Sept 2023