• Maintain BUY and MYR1.49 TP, 59% upside and c.5% FY23F (Jul) yield. FY22 results beat estimates thanks to a strong showing in 4QFY22. Current valuation is attractive, at below mean, taking into account the 53% earnings growth in FY23F, underpinned by normalisation in production capacity and contribution from new production lines. Meanwhile, the resolution of labour standard issues should remove the ESG overhang on VS Industry. We also like the sector for the cost plus model, hence, its insulation from the inflationary environment.

• FY22 results above expectations. Core net profit of MYR208m (-25% YoY) accounted for 106% and 111% of our and consensus forecasts on higher-than-expected margin in 4QFY22, which was aided by claims and adjustments from earlier job orders. As such, we make no changes to our FY23F-24F earnings and introduce FY25F, which implies 9% growth. Our TP remains at MYR1.49, based on an unchanged 18x P/E, or close to +1SD from its 5-year mean. The valuation implies a c.10% premium over the one we ascribe to peer SKP Resources (SKP MK, BUY, MYR2.22), warranted by VSI’s larger market capitalisation and profit base.

• Results review. YoY, FY22 revenue slid marginally by 2% to MYR3.9bn, with order delivery adversely affected by the shortage of labour and supply chain disruption. As a result, the diseconomies of scale and negative operating leverage compressed core net margin by 1.6ppts to 5.3% from 6.9%, and dragged down FY22 core net profit by 25%. QoQ, 4QFY22 revenue grew 8% to MYR1bn following the arrival of new labour supply and easing of supply chain disruption. Correspondingly, 4QFY22 core net profit surged 42% QoQ to MYR73m – in tandem with the higher volume but was also aided by the abovementioned claims and adjustments.

• Outlook. We foresee the earnings recovery momentum gaining further pace going forward as production capacity will likely be boosted by the arrival of more foreign labour as well as improvement in parts and components supply. This should enable VSI to ramp up its new production lines and expand margins on higher operational efficiency – propelling FY23F earnings growth of 53%. In addition, the progressive contribution from new production lines should offset the shortfall from the more cautious volume guidance by some of its key customers. Meanwhile, the positive findings from the social audit on labour practice should largely put an end to the ESG concern and remove the overhang on the stock, hence, the stock valuation should recover going forward.

• Risks to our recommendation include a slowdown in the global economy and supply chain disruption.

• ESG. Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% discount or premium to our TP.

Source: RHB Research - 28 Sep 2022