The Group reported a headline net profit of RM26.8m (-47.8% YoY, -11.8% QoQ) for 3QFY23, the weaker YoY numbers due in part to higher material and operating costs, and notably higher finance costs as a result of its sukuk drawdown. Cumulative 9MFY23 core net profit of RM142.1m (+19.6% YoY), which excludes RM26.4m in foreign exchange losses and RM2.1m in asset disposal gains, is slightly behind at 69% and 70% of our and consensus full-year estimates respectively. Consumption spending has remained relatively steady, albeit marginally weaker, despite global monetary tightening. Costs have remained elevated nonetheless, pressuring margins in the process. We cut FY23/24/25 estimates by 9.0% on average to account for this, in addition to notably higher finance costs. 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 RM1.02 (RM1.14 previously). A third interim dividend of 0.4sen was declared, bringing cumulative year-to-date dividends to 1.2sen.

• 3QFY23 revenue of RM996.8m (+7.5% YoY, -13.1% QoQ) is stronger on annual basis due to higher sales orders from key customers, though expectedly weaker on a sequential basis due to subdued purchasing power globally as a result of the aforementioned monetary tightening.
  
  By country of operations, Malaysia continues to underpin Group sales, making up ~70% of total revenue, with a 3QFY23 contribution of RM693.8m (+3.6% YoY). Revenue of RM235.1m (+44.4% YoY) for the Singapore segment (a US-based customer, previously classified under its Malaysian operations) was higher in line with improved sales orders from a key customer. The Indonesian operations saw a decline in revenue to RM59.1m (-29.5% YoY) due largely to lower sales orders during the Hari Raya period while China continued to de scale its operations, with revenue at only RM8.6m (-24.6% YoY).
   
• 3QFY23 reported net profit of RM26.8m (-47.8% YoY, -11.8% QoQ) includes RM1.1m in foreign exchange (FX) loss. Excluding a cumulative RM26.4m in FX losses and RM2.1m in asset disposal gains, 9MFY23 core net profit would have come in at RM142.1m (+19.6% YoY) otherwise. Current year operations are largely impacted by higher electricity, labour and finance charges, as well as unfavorable FX rates, all of which have lowered net margins to 3.4% (9MFY23: 4.6%).
   
• Outlook. Orders from key customers are expected to pick up over the medium to longer-term as inflationary pressures abate amid an easing in global monetary tightening as well. VSI’s customers are mostly industry-leaders in their respective consumer spaces and less susceptible to down-trading and/or switching by customers. In addition, the Group’s ample cash-pile will come in handy should merger and acquisition (M&A) activities be on the cards.

Source: PublicInvest Research - 16 Jun 2023