• Maintain BUY and MYR1.39 TP, 31% upside with c.2% FY25F (Jul) yield. VS Industry’s 1QFY25 results fell below expectations due to a drag stemming from sharp FX rate changes. Still, this does not alter our investment thesis that its market share gains and beefing up its internal supply chain will drive the company’s medium-term growth prospects. Its outlook is exciting, with sizeable new job orders to execute in 2025F and a favourable change in business dynamics at Customer X post the streamlining initiatives under the new management team.

• 1QFY25 results are below expectations. Core net profit of MYR31m (-38% YoY) accounted for only 11-12% of our and consensus full-year forecasts due to sharp margin erosion following the drastic depreciation of the USD. Post- results, we cut FY25F earnings by 14% but keep FY26-27F net profit unchanged. Our TP remains at MYR1.39 (inclusive of a 2% ESG discount), based on fully-diluted 19x 2025F P/E, which is at +2SD from its 5-year mean.

• Results review. YoY, 1QFY25 revenue fell 4% to MYR1.1bn as the positive throughput volume growth was masked by an unfavourable FX translation. This also led to a material GPM erosion of 0.7ppts to 7.6% in 1QFY25. Consequently, 1QFY25 net profit dipped 38% to MYR31m. QoQ, 1QFY25 revenue and core net profit were 8% and 62% lower due to the abovementioned FX headwinds, a swing in seasonal demand and a change in its product mix. A first DPS of 0.4 sen was declared (1QFY24: 0.3 sen).

• Outlook. VSI’s job order prospects are positive, fuelled by the recovery in demand and new product launches lined up by key customers. We highlight the recent lifting of restrictions to manufacture Customer X’s floorcare products following its restructuring exercise under new management will open up more opportunities for VSI to secure more jobs. More importantly, this signifies a stronger relationship between the company and Customer X – evidenced by VSI securing two new models from Customer X, with commercial production slated to begin by Feb/Mar 2025. Elsewhere, in the Philippines, the progress of renovation works at its leased plant is on track, and production is scheduled to commence in Mar/Apr 2025. This should underpin VSI’s near-term earnings growth, with MYR1.2bn worth of orders in hand and the expectation of another contract win by 1QCY25F.

• Downside risks to our recommendation include a major delay in expansion plans and a significant loss of market share.

Source: RHB Securities Research - 4 Dec 2024