• Upgrade to BUY from Neutral, with higher MYR1.02 TP from MYR0.81, 22% upside, c.4% FY25F (Jul) yield. VS Industry’s 1HFY24 results disappointed on a drastic order cut by Customer X in 2QFY24. This could be an effect of inventory adjustment rather than structural weakness, evidenced by the quick recovery in volumes. New product launches in the pipeline, steady volume growth of other key customers, margin upside from new capabilities, and prospects of new customers should catalyse the stock.

• 1HFY24 results below expectations. Core net profit of MYR62m (-31% YoY) met only 31-34% of our and consensus’ forecasts on lower-than-expected throughput volumes and the ensuing GPM impact from negative operating leverage. Post results, we cut FY24-26F earnings by 19%, 5%, and 1%. That said, our TP rises to MYR1.02 (inclusive of a 2% ESG discount) after the roll- over of valuation base year to FY25F and higher ascribed P/E of 16x (from 14x) to account for the more exciting outlook. The valuation is close to +1SD over the stock’s 5-year mean and represents a premium over peer SKP Resources (SKP MK, NEUTRAL, TP: MYR0.78), warranted by VSI’s larger market capitalisation and more diversified customer base.

• Results review. YoY, 1HFY24 revenue dipped 16% to MYR2.1bn as the order volume from Customer X fell sharply in 2QFY24. This also had a significant impact on GPM (1HFY24 GPM: -2.8ppts to 7.2%) considering the vertically integrated production lines for Customer X, and hence, high fixed costs. As a result, 1HFY24 core net profit fell 31% to MYR62m. QoQ, 2QFY24 revenue and core net profit were 22% and 73% lower respectively, mainly due to the abovementioned order cut and GPM drag. A second interim DPS of 0.3 sen was declared, bringing 1HFY24 payout to 0.6 sen (1HFY23: 0.8 sen).

• Worst is likely over. Management guided that Customer X’s order volume is gradually recovering, and this should support a quick earnings rebound sequentially. Also, Customer X has new product launches in the pipeline, in which VSI will participate, while the order volumes from its other key customers are growing steadily. The group is also focusing on upgrading its capabilities by offering more services and solutions to its customers. This should bear fruit soon by enhancing its profit margins. We assume FY25F net margin will expand by 1.1ppts YoY to 5.1%. Ongoing discussions with prospective customers are also seeing good progress, and VSI is hopeful of a positive outcome as soon as end-2024. Our forecasts have reflected new order wins of MYR100m and MYR 400m in FY24 and FY25F.

• Risks to our recommendation include a major slowdown in the global economy and a significant loss in market share.

Source: RHB Research - 29 Mar 2024