• Maintain NEUTRAL, with new TP of MYR1.02 from MYR0.84, 0% downside and c.4% FY24F (July) yield. VS Industry’s FY23 results beat expectations, aided by a significant FX gain booked in 4QFY23. Our FY24F earnings growth of 34% reflects improving market conditions, contribution from new customers and higher operational efficiency. However, this may have already been priced in the current valuation. Further upside to earnings and valuation could be capped by market softness in China and uncertainties on the global economic growth ahead.

• VSI’s FY23 results above expectations. Core net profit of MYR189m (-9% YoY) accounted for 105-116% of our and consensus forecasts, aided by an FX gain of MYR19.7m booked in 4QFY23. Pending the analyst briefing, we maintain our FY24F-25F earnings and take opportunity to roll out FY26F earnings (+12%). That said, we now ascribe a higher 16x P/E (+1SD) from 13x to its FY24F EPS to arrive at our new TP of MYR1.02 (inclusive of a 2% ESG discount). This is to factor in improving market conditions and order visibility, with our earlier fear of a further cut in orders not materialising.

• Results review. YoY, FY23 revenue surged 18% to MYR4.6bn with production throughput normalising from a supply chain disruption and labour shortage. That said, FY23 GPM slipped 0.7 ppt to 9.6% despite the higher production volume, mainly dragged down by higher labour and utilities costs. This, together with the higher financing expenses, led to a 9% decline in FY23 core net profit to MYR189m. QoQ, 4QFY23 revenue jumped 17% to MYR1.2bn thanks to the seasonality factor as orders from major customers picked up to correspond with the year-end demand. Meanwhile, GPM expanded by 2.6 ppts likely due to a more favourable product mix and higher operational efficiency. Coupled with the swing in FX impact, 4QFY23 core net profit spiked strongly by >100% to MYR71m.

• Outlook. Going forward, we anticipate the positive earnings momentum to sustain sequentially, taking into account the pick-up in seasonality in view of the year-end festive season. Generally, management has observed better order appetite from major customers as the inventory adjustments may have come to an end. In addition, some customers have started to roll out new products having taken a more conservative stance earlier. On top of that, we gather that VSI is also working on new orders whilst at the same time expanding its supply chain to offer more value-added services to its customers. All in all, we forecast FY24 earnings growth of 34% after pencilling in the abovementioned.

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

Source: RHB Securities Research - 27 Sept 2023