Prospect remains intact. Despite lower production guidance from VS’ customers amid macroeconomic headwinds, FY23 earnings will be supported by two main pillars (i) improving utilization rate due to the return of foreign labour and (ii) stronger contributions from customer X and Y. Given customer X’s low inventories level following the recent termination of a Malaysia contract manufacturer, VS is expecting a sharp volume ramp-up for Customer X. Coupled with the anticipation of better utilization rate following the improving labour shortage issue, we foresee better earnings in the upcoming quarters. On the other hand, contribution from i-Park Senai Airport City facility that is currently running at sub-optimal capacity of 40-50% for customer Y should start to pick-up strongly.

A top ESG-rated EMS name. As ESG has gained greater prominence lately by investors – especially on EMS players after the labour abuse scandal by another EMS player last year – VS has taken several initiatives to strengthen this area, supported by the group qualification in RBA and F4GBM Index for its constant pursuit towards sound corporate governance and good sustainable practices. To recap, VS has developed a Supplier Ethical & Environment Code of Conduct (COC) which requires suppliers to acknowledge the COC and agree to comply with the code to build a responsible supply chain. As for the forced labour issues that caused the EMS sector to experience knee jerk sell down in 4Q22-1Q22, PWC has concluded the review in Jun 2022 with the finding that there are no systemic forced labour practices within the group identified.

Grossly oversold. After correcting 51% from 52-week high of RM1.65 to RM0.80 yesterday, VS is grossly oversold (key supports: RM0.78-0.81) and trading at an undemanding FY23 11.3x P/E (22% discount against 5-year average of 14.6x). A successful breakout above RM0.85, could spur the stock price toward RM0.88-0.91- 0.96 levels. Cut lost at RM0.72.

Source: Hong Leong Investment Bank Research - 17 Nov 2022