• Maintain NEUTRAL and MYR0.84 TP, 1% downside. VS Industry’s 9MFY23 (July) results disappointed on weaker-than-expected sales and the ensuing margin drag. Whilst we foresee earnings to improve QoQ in 4QFY23F, we believe there is too little clarity on the global demand outlook to point to a sustainable and visible earnings recovery at this point. Therefore, investors are likely to continue staying on the sidelines, taking into account the material earnings downside risks arising from the heavy fixed cost structure of the electronic manufacturing services (EMS) business.

• 9MFY23 results were below expectations. Net profit of MYR118m (-13% YoY) met only 55-58% of ours and consensus’ estimates. The negative deviation could be attributed to weaker-than-expected sales and the ensuing margin drag. Post-results, we cut FY23F-25F earnings by 25%, 15%, and 14%. Notwithstanding, our TP stays at MYR0.84, based on an unchanged 13x P/E after rolling over the valuation year to FY24F from 2023F and the ESG score revision from 3.0 to 2.9. The valuation is in line with the one ascribed to peer SKP Resources (SKP MK, NEUTRAL, TP: MYR0.95).

• Results review. YoY, 9MFY23 revenue rose 18% to MYR3.4bn, boosted by higher orders from major customers whilst 9MFY22 was dragged down by labour and part components shortage. That said, 9MFY23 GPM slipped 0.1ppt to 9.3% following the slowdown in volume starting 2QFY23, further dragged by higher electricity and labour costs. QoQ, 3QFY23 revenue dipped 13% to MYR1bn on lower order volume by most of the major customers given the challenging business environment, as well as the weaker seasonality. Correspondingly, net profit fell 12% QoQ to MYR27m.

• Outlook. We learnt that some major customers have increased their orders from the low base in the past two quarters whereas some are lining up new product launches. On top of that, seasonality should also pick up approaching the second half of 2023. With that, we anticipate 4QFY23F earnings to improve QoQ. Essentially, management is of the view that the volume may have bottomed out but the extent of the volume recovery or normalisation will largely hinge on global demand amidst the slowdown in major economies.

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

Source: RHB Research - 16 Jun 2023