Investment Highlights

• We maintain HOLD recommendation on V.S. Industry (VSI) with a lower fair value (FV) of RM0.67/share (from RM0.73/share previously) to account for lower earnings estimates. Our FV is based on an unchanged CY24F target PE of 15x (Exhibit 1), at parity to the group’s 5-year average. We made no adjustment to our neutral 3- star ESG rating.

• After an analyst briefing yesterday, we reduced FY24F-26F earnings by 12%/7%/9% to account for weaker sales orders from VSI’s key customers and lower profit margin assumptions to reflect lower economies of scale.

• Specifically, VSI’s 1HFY24F revenue will be impacted mainly by VSI’s key customer, Customer X (which account for 25%-30% of VSI’s FY24F revenue), as a result of its high inventory levels coupled with current weak consumer sentiments, especially in Western regions due to elevated inflation and interest rates. Nevertheless, this could be partially offset by new model launches by a USA-based customer together with a coffee brewer and pool cleaner.

• In view of lower plant utilisation rate, VSI will attempt to cushion profit margins by incorporating some in-house processes which were previously outsourced. Nevertheless, we believe this is insufficient to offset diminished economies of scale. Hence, we reduced FY24F-26F gross profit margin assumptions in to 3.8%/4.3%/4.7% from 4.0%/4.5%/4.9%.

• To recap, VSI progressively acquired 51% equity stake in HT Press Work (HTPW) back in May-Sep 2023 to capitalise on HTPW’s potential RM100mil contract from a new US-based MNC. The MNC supplies consumer electronics and could allow HTPW to generate a double-digit gross profit margin (GPM) exceeding VSI’s 9%-10% in FY23.

• We gathered that mass production of this RM100mil order could start in 3QFY24F, instead of 2QFY24F that was previously guided owing to steep learning curve. This is reflected in our revised FY24F-26F earnings.

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

• Going forward, we anticipate a weaker 2QFY24F revenue and profit due to weaker demand from VSI’s key customer. However, we believe a progressive recovery could commence in 2HFY24F on expectation of customers’ depleting inventory levels.

• The stock is trading at CY24F PE of 17.5x, 17% above its 5-year average of 15x with a mild dividend yield of 2%, we see limited upside potential.

Source: AmInvest Research - 18 Jan 2024