• Maintain NEUTRAL and TP of MYR0.86, 8% downside. VS Industry’s 1QFY23 (Jul) results met expectations, thanks to contribution from new production lines and the arrival of new labour supply. Looking ahead, the increased orders from Customer X should underpin FY23F growth. However, we remain wary of earnings downside risks stemming from further cuts in orders from other key customers on the back of the challenging global macroeconomic environment. As such, we believe the stock’s risk- reward profile is balanced at this point.

• 1QFY23 results within expectations. Core net profit of MYR61m (+54% YoY) met 23-24% of our and consensus’ estimates. Post results, we make no changes to our earnings forecasts and TP of MY0.86 (no adjustment on ESG score of 3.0), based on 13x FY23F P/E, which is close to the stock’s 5-year mean. The valuation implies a 2x discount to the one ascribed to peer SKP Resources (SKP MK, BUY, TP: MYR1.95) to account for the relatively higher degree of slowdown risks.

• Results review. YoY, 1QFY23 revenue surged 34% to MYR1.3bn thanks to higher orders from Customer X, whilst 1QFY22 was affected by workforce restrictions under the lockdown enforcement. Correspondingly, 1QFY23 operating profit jumped 66% YoY to MYR87m with margin normalising by 1.3ppts to 6.8%. QoQ, 1QFY23 revenue was 29% higher, driven by the commissioning of new production lines and arrival of new labour. However, gross profit only grew 3% QoQ to MYR134m on a lower GPM of 10.4% (-2.6ppts) due to unfavourable product mix. 4QFY22 was also aided by claims and adjustments. Together with higher interest expenses and normalised effective tax rate (ETR), 1QFY23 core net profit slid 17% QoQ to MY61m.

• Outlook. We foresee quarterly earnings run rate to hover at around the 1QFY23 level – taking into account the contribution from new production lines and the unexciting volume guidance from a few key customers that have earlier revised down their orders. Meanwhile, we gather operational issues including labour shortage and supply chain disruptions have largely eased. Notwithstanding the 22% forecasted earnings growth in FY23, we opt to be more conservative with our valuation, considering the cautiousness on the macroeconomic picture, rising interest rates environment, and earnings downside risk from further order cuts.

• Risks to our recommendation include better/worse-than-expected global economy growth and supply chain disruptions.

Source: RHB Research - 19 Dec 2022