• Management is guiding a high single-digit revenue growth and net margin of c.4.5% in FY24F on improving utilisation, ahead of new product launches.
• Its recent acquisition of HT Press Work (HTPW) boosts its in-house metal stamping capabilities and could translate to new order wins, in our view.
• Maintain Hold as the stock appears to be fairly valued at 17.1x FY24F P/E, with a slightly higher TP of RM0.92 as we lift our EPS forecasts.

FY23 results recap

4QFY7/23 core net profit of RM48.7m (ex-forex gain of RM19.7m and PPE impairment loss of RM2.3m) fell by 41% yoy despite a revenue growth of 16% yoy as the group incurred higher labour, electricity, and finance costs. On a full-year basis, core net profit fell by 24% to RM165m despite revenue growth of 18% due to elevated operating expenses. New product launches were largely delayed amid weak consumer sentiment, resulting in suboptimal productivity for certain production facilities. Its net gearing improved to 10% in FY23 (FY22: 19%) due to lower capex amid the industry slowdown.

Fine-tuning estimates; introduce FY26F forecast

We fine-tune our FY24-25F net profits and introduce FY26F estimates. We project VSI’s revenue to grow 6-8% in FY24-26F, largely driven by the resumption of new product launches from its customers, especially its US-based and coffee brewer customer. Meanwhile, order volumes and visibility from Customer Y appear to be ramping up positively, following two soft years, which should translate to better economies of scale for the group. We, however, expect a flattish revenue trend for Customer X in FY24F as demand for its hair care and home appliance products remains relatively stable, while visibility on new product launches may only be seen by 2HFY7/24F. The overall improvement in utilisation rate could cushion the sustained elevated operating expenses, in our view, translating to improving net margins from 3.6% in FY23 to 4.6-6.1% in FY24- 26F. Separately, its recent investment of RM9m for a 51% stake in HT Press Work S/B (HTPW) also adds to its in-house capability in metal stamping, which could translate to more order wins. The group is also looking to generate additional rental income from its underutilised operations in China as infrastructure connectivity improves, which could further narrow its China operations’ losses for FY24F (FY23 PBT loss of RM19m).

Maintain Hold

We maintain our Hold recommendation with a slightly higher GGM-derived TP of RM0.92 as we tweak our EPS higher. Recovery prospects appear to be well reflected in its current share price, in our view, with the stock trading at 17.1x FY24F P/E, slightly above its 8-year mean of 15.9x, and 5-year pre-pandemic average of 14.6x. We prefer SKP Resources (Buy, TP: RM1.28, CP: RM1.00) for exposure to the consumer EMS recovery. Upside risks include stronger-than-expected order visibility across its key customers and disposal of its China operations materialising, while downside risks are prolonged weak consumer sentiment, loss of market share from key customers, and margin drag from the China ops. 

Source: CGS-CIMB Research - 29 Sept 2023