Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with an unchanged fair value of RM1.27/share, pegged to an FY23F PE of 16x. Our target PE is based on 1 standard deviation above VSI’s 3-year average forward PE. We made no adjustment to our neutral 3-star ESG rating (Exhibit 5).

• VSI’s 9MFY22 core earnings of RM105mil, excluding net forex gain, accounted for 63% of our full-year estimate and 59% of consensus. However, we deem the results within expectations on optimism that the group will be able to ramp up its production in 4QFY22, following the gradual arrival of migrant workers.

• To date, the group has received 1,100 workers, with additional 2,300 expected to arrive in the coming months. The additional labour force will be able to boost fulfilment of orders from key customers. As likely economies of scale and better operational efficiency could support a stronger 4QFY22 bottomline, we make no changes to the group’s FY22F earnings.

• We also maintain FY23F-FY24F earnings on the assumption that VSI will be able to pass on the newly imposed minimum wage of RM1,500/month within 6 months, as evidenced by the last minimum wage hike in 2020.

• The group’s 3QFY22 profit before tax fell 37% YoY, in tandem with a 14% YoY revenue reduction. This is due to sub-optimal production levels for a key customer, coupled with higher labour and raw material costs. Operational inefficiencies were further exacerbated by supply shortages, resulting in core profit margin compression, which fell 2.2%-point YoY to 4.6%.

• On a QoQ basis, VSI’s 3QFY22 core net profit increased by 14% despite a 9% revenue decline, thanks to a more favourable sales mix. The group declared a dividend of 0.4 sen/share, bringing FY22 dividend to 1.2 sen/share to date.

• In terms of the independent review on labour practices by PwC Consulting, the group highlighted that the audit is still ongoing. We expect to receive further updates by the end of this month. Recall that the review commenced on 3 March 2022 and is expected to complete within 4 months.

• While we are upbeat on the improving labour situation, we remain cautious on other challenges brought about by the Covid-19 pandemic and Russia-Ukraine conflict. These include persistent supply chain disruptions and stagflationary outlook, leading to lower demand for discretionary goods.
   
• Nonetheless, We Remain Positive on VSI’s Longer-term Outlook, Underpinned by Its:

(i) ability to offer turnkey electronic manufacturing services solutions as a vertically integrated player;

(ii) improving overseas operations supported by higher sales orders as well as better cost rationalisation initiatives in China; and

(iii) Ongoing Commitment to Better ESG Standards, Particularly on Improving Employees’ Welfare.

Source: AmInvest Research - 27 Jun 2022