• Still BUY, new TP of MYR1.49 from MYR1.26, 46% upside with c.2% FY22F (Jul) yield. VS Industry’s 9MFY22 results missed expectations, as its recovery continued to be capped by the crunch in labour and component parts. Its current valuation is attractive – trading below the mean P/E – taking into account a 61% earnings growth in FY23F and the resolution of labour standard issues, with the audit findings expected to be announced soon. We also like the electronic manufacturing services sector for its cost- plus model – hence the insulation from the inflationary environment.

• 9MFY22 results fell below expectations. Net profit of MYR135m (-34% YoY) met 66-67% of our and consensus full-year forecasts. Despite the anticipation of a stronger 4QFY22, the recovery in 9MFY22 was still milder than expected. Post results, we cut FY22F-24F earnings by 4%, 11%, and 10% after refreshing our sales assumptions in accordance with management’s guidance. However, our TP rises to MYR1.49 after we roll over the valuation base year from 2022F to FY23F based on an unchanged 18x P/E or close to +1 SD from its 5-year mean. The valuation implies a c.5% premium over the one we ascribed to its peer, SKP Resources (SKP MK, BUY, TP: MYR2.22), warranted by VS Industry’s larger market capitalisation and profit base.

• Results review. YoY, 9MFY22 revenue fell 5% to MYR2.9bn as production volume was restrained by labour shortages and supply chain disruptions throughout the year. 9MFY22 GPM slipped 4.1ppts to 9.4% on lower production efficiency following the drop in volume, as well as the higher raw material and labour costs. As a result, 9MFY22 PBT dipped 39% to MYR167m. QoQ, 3QFY22 revenue was 9% lower at MYR928m – largely due to the fewer working days – but gross profit grew 4% to MYR93m on a higher GPM of 10% (+1.2ppts), thanks to a more favourable product mix. 3QFY22 opex moderated by 7% QoQ, in tandem with the lower revenue and aided the 15% QoQ jump in 3QFY22 net profit to MYR51m.

• Positive momentum to be sustained. We expect earnings to continue recovering, post the arrival of new foreign labour (intake of 1,400 workers) starting at end May. This should effectively lift the company’s production capacity and output from 4QFY22 onwards. Beyond the near term, its exciting 61% earnings growth in FY23 should be underpinned by the normalisation in production and contribution of new production lines. On the other hand, the social audit on labour practices is ongoing, and is estimated to be completed soon. We believe that convincing positive results of this audit should remove the overhang on the stock.

• Downside risks to our recommendation include a protracted supply chain disruption and major delays in the arrival of new foreign workers.

Source: RHB Research - 27 Jun 2022