• V.S Industry (VSI) is one of Malaysia’s largest electronic manufacturing service (EMS) provider that deploys a vertically integrated business model. It covers various stages of the production until final processes of packaging and logistics, hence minimising its supply chain risks.

• The company’s strength also lies on its diversified customer base. Currently, it is looking to secure a new major client to mitigate the impact of subdued orders from existing clients.

• The company has a dividend policy of 40% of net profit, though it has been rewarding shareholders with a larger payout.

• The stock price is currently trading at 16.1x forward PER. This is below its 4-year average PER of 19x and 10% discount to peer average.

One of Malaysia’s Largest EMS Provider

VS Industry (VSI) was established in 1979 with plastic injection business (manufacturing cassettes and video tape components) in Singapore. Afterwards, VSI relocated to Johor, Malaysia in 1982. The group was listed on Bursa Malaysia in 1998 and expanded into China and Indonesia market in early 2000s. Currently, VSI is one of Malaysia’s largest homegrown of Electronic Manufacturing Services (EMS) provider and it was ranked as 27th largest EMS player in the world. The group provides one-stop complete EMS such as Design and Engineering, supply chain management, manufacturing services, logistic and fulfilment and quality assurance. To date, VSI has served customer from various industries such as electronics, automotive, medical devices, industrial automation machinery and others.

Operates in Multiple Countries Globally

On international front, VSI's Indonesia (Jakarta) operations provide support to other contract manufacturers (CMs) and Original Equipment Manufacturers (OEMs) in the vicinity. Meanwhile, its manufacturing facility in Zhuhai, China is affected by underutilisation of capacity due to the highly challenging environment. Currently, VSI is exploring asset sale exercises for its entire China operations. Meanwhile, its Singapore operation generally serves as the marketing arm for operations in Malaysia. In summary, VSI have a total combined of >3mn sf built up space as well as additional land of 8.9-acre in Johor that the group acquired in Nov 2021 for future expansion.

Vertical Integration Services Strategy

VSI’s business model is known as a complete vertically integrated EMS where the operation is streamlined through direct ownership of various stages of the production process rather than relying on external contractors or suppliers. This will ensure the reliability of its services as well as minimise supply chain risks.

The Group provides services from Research and Development (R&D) stage up to Logistics and Fulfilment phase (Figure 1). In 2023, VSI acquired 51% stake in HT Press Work (HTPW) which specializes in metal stamping, tools and die design, and machining as part of its vertical integration business strategy. To note, VSI and HTPW serves the same customer – namely customer X (hold 47% of VSI’s revenue in FY23). This acquisition is viewed as a strategic move by VSI to expand its profit margin as it can now insourcing directly with HTPW’s supplies and expertise.
 

Financial Highlights

VSI revenue fell by 18% YoY to RM3.2bn in FY20 (Chart 1) attributed by temporary stoppage in production stemming from imposition of Movement Control Order (MCO) in Malaysia as well as lower order volume from key customers. Afterwards, revenue normalised to RM4bn in FY21 and FY22 before it rose further by 15% YoY to RM4.6bn FY23 thanks to rising orders from existing and new customers. However, earnings were flattish in FY22- FY23 as operational costs remained heightened with higher labour cost, electricity tariff and financing cost.

To recap on its latest financial result for 1HFY24, VSI earnings declined by 29% vs 1HFY23 to RM65mn no thanks to continued subdued demand from key customer (particularly from Customer X in 2QFY24). This has led to poor plant utilization rates for the quarter. Despite that, VSI declared a second interim dividend of 0.3 sen per share, payable on April 30, 2024.

Healthy Balance Sheet with Low Gearing

As of FYE23, VSI possessed RM689mn in cash and a net gearing of 0.07x. In view of low gearing, VSI is in a good position to pursue more mergers and acquisitions (M&A) opportunities in future.

Dividend Policy

The group has consistently rewarded its shareholder for the past 10 years, inline with its dividend policy to pay at least 40% of net profit payout. In FY23, its dividend payout ratio was at 48% as VSI declared a total dividend of 2.2sen. This translated to a yield of 2.7% based on current price.

Business Outlook

Looking ahead, the group foresees a gradual recovery fuelled by increased orders from key customers as well as potential of securing a new major customer by the end of CY24. Additionally, VSI guided that it has strengthened its supply chain management by enhancing its in-house capabilities for supply of certain components which will be ready for mass production in FY25F, potentially boosting its margin.

Current Valuation: Trading Below Mean

The stock price is currently trading at PER of 16.5x (Chart 4) which is below its 4-year historical average PER of 19x. We think this is due to market being cautious on its near term outlook amidst sluggish electronics demand coupled with inventory rationalisation from its largest clients.

Generally, its peer companies include SKP Resource, Nationgate Holdings, PIE industrial and Kumpulan Perangsang Selangor (KPS). Notably, Nationgate is traded at higher PE ratio of 49.2x CY23 as compared to its peers’ average P/E of 31.5x as it is expected to benefit from global secular trends owing to its exposure to data centre.
 

Source: BIMB Securities Research - 4 Apr 2024