The Group’s 2QFY23 net profit came in sequentially weaker at RM30.4m (-31.8% YoY, -50.0% QoQ) though the current quarter also included a foreign exchange loss of RM19.8n. Excluding this, cumulative core net profit of RM110.9m (+32.2% YoY) is within our expectations at 47% of full-year estimates though behind consensus at 45%. That said, we continue to remain wary over potentially weaker consumption spending in the near term, particularly in the US and Europe which have seen rapid interest rate hikes which will invariably weaken sales. We err on the side of conservatism and cut FY23 estimates by 13.2% to account for weaker sales. We still like the longer-term investment merits of the company, underpinned by steady order flows from its key customers, and affirm our Outperform call though with a lowered PE-based target price of RM1.14 (RM1.23 previously). A second interim dividend of 0.3sen was declared, bringing cumulative year-to-date dividends to 0.8sen.

• 2QFY23 revenue of RM1.15bn (+13.1% YoY, -11.4% QoQ) is weaker on a sequential basis, early signs of waning purchasing power globally as growth was supposed to have been stronger given the securing of new order flows last year (reflected in the YoY growth).
  By country of operations, Malaysia continues to underpin Group sales, though 2QFY23 revenue of RM867.0m is notably weaker by 14.0% QoQ. Revenue in the Singaporean segment (a US-based customer, previously classified under its Malaysian operations) remained encouraging with a +4.5% sequential growth meanwhile. The Indonesian operations also recorded weaker sequential sales, with revenue of RM94.9m (-10.4% QoQ) though still remaining relatively steady YoY (+6.6%). No headway is being seen in China, with current quarter’s revenue of RM9.9m slumping 58.7% YoY and 24.5% QoQ.

• 2QFY23 net profit of RM30.4m (-31.8% YoY, -50.0% QoQ) includes an RM19.8m foreign exchange loss, excluding which would have contributed to a cumulative 1H 2023 core net profit of RM110.9m (+32.2% YoY) otherwise. Operating margins (core) remains relatively steady at 4.4% (1Q: 4.7%), with variations in current product mix meaning that FY21 net margins (6.1%) will not be achieved this financial year.

• Outlook. While orders from key customers are expected to remain steady over the medium to longer-term, the looming specter of a global economic recession has culminated with weakening consumer confidence and increasingly subdued consumption spending. Those VSI’ customers are mostly industry-leaders in their respective consumer spaces and less susceptible to down-trading and/or switching by customers amid an increasingly challenging economic environment, we err on the side of conservatism and trim FY23 earnings expectations while keeping forward estimates comparatively lower vis-à-vis consensus.

Source: PublicInvest Research - 23 Mar 2023