Focus Malaysia reported that migrant worker rights specialist Andy Hall has withdrawn his voluntary engagement with VSI with immediate effect. We gather that Hall’s decision to part ways with VSI was due to lack of common ground between both parties. Management shared that they have taken the crucial actions to amend the challenges namely: (i) appointing PwC Consulting to conduct a third-party audit review; (ii) audit review based on the 11 ILO Indicators of Forced Labour; (iii) supplementing the audit methodology by PwC Consulting with independent labour right experts and lawyers and; (iv) audit review to cover the whole scope of VSI’s employees. Reiterate BUY with unchanged TP of RM1.78 based on 20x of CY22 EPS. Following the recent sell down, the stock currently trading at an attractive 10x FY23PE, which is close to -1.5 SD below its 5-year mean.

NEWSBREAK

Focus Malaysia reported yesterday that migrant worker rights specialist Andy Hall has withdrawn his voluntary engagement with VSI with immediate effect barely three months into their joint collaboration. Management of VSI held an investor’s briefing yesterday in response to that development.

HLIB’s VIEW

Recap. Recall that in Dec 2021, in the midst of a foreign labour fiasco following the termination of one of Malaysia’s contract manufacturer by Dyson, VSI issued a joint statement with Andy Hall to work together in tackling migrant workers’ welfare. The discussion progressed towards addressing the challenges identified from the Labour Recalibration Programme (LRP).

Double edged sword with Labour Recalibration Programme. Following the border closure and labour shortage, the government in Nov 2020 introduced the Labour Recalibration Programme (LRP) that aimed to allow employers in certain sectors such as construction, manufacturing, plantation, agriculture and services to legally employ undocumented foreign workers. Given the lack of clarity for the newly introduced rules, VSI determined to address the challenges identified from the LRP and the existing migrant worker recruitment process of the company. The group committed that all migrant workers hired through LRP shall be urgently placed under the VSI’s direct employment. From what we gather, c.200 out of 1,000 workers from this programme have been successfully converted as VSI direct employees with the remaining unapproved number still currently under review. Should these remaining workers be unable to transfer by the deadline of June 2022, the group will arrange the necessary steps for them to return to their home country.

Parting ways but giving full attention to issue on hand. We gather that Andy Hall’s decision to part ways with VSI was due to lack of common ground between both parties. Management shared that they have taken the crucial actions required to amend the challenges namely: (i) appointing a credible firm, PwC Consulting to conduct a third-party audit review of VSI’s labour practices; (ii) audit review to be based on the 11 International Labour Organization (ILO) Indicators of Forced Labour (Figure #1); (iii) supplementing the audit methodology by PwC Consulting with independent labour right experts and lawyers and; (iv) audit review on the whole scope of VSI employees including local workers, foreign workers and newly absorbed workers under the LRP. We view this effort to take a thorough check on the labour welfare holistically (vs to only focus on LRP as suggested by Andy Hall) positively as this would enable the group to come clean and rectify any gaps under the long standing labour issue in the manufacturing sector.

Waiting for the quota to be filled. Management shared that VSI have acquired an approved quota of 3,700 foreign workers pending border reopening. Should the government announce to allow the entry of foreign workers this year, we opine that VSI would be able to cater to the robust order growth from its customers. The group has spent RM30m for the new hostel which could house an additional 1,800 workers.

Forecast. Unchanged. Reiterate BUY with unchanged TP of RM1.78 based on 20x of CY22 EPS. Following the recent sell down, the stock currently trading at an attractive 10x FY23PE, which is close to -1.5SD below its 5-year mean. We like VSI given the (i) healthy order outlook brought by the steady demand of consumer electronic products; and (ii) margin expansion from customer diversification efforts. As the biggest EMS player in Malaysia with solid track record, we opine that VSI is a prime beneficiary from the intensifying trade diversion theme.

Source: Hong Leong Investment Bank Research - 4 Mar 2022