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. We make no adjustment to our neutral 3-star ESG rating (Exhibit 3).

• Our forecasts are maintained following VSI’s 3QFY22 results briefing. Below are the key takeaways:

• Management expects 2,000 migrant workers from Myanmar to arrive by the end of FY22F with another 1,700 workers joining by September. The additional workforce of 3,700 should allow VSI to sustain its fulfilment of orders until the December 2022.

• Supply chain disruptions remain a key operational headwind to the group. However, management noticed that the bottleneck is easing. The group continues to be prudent in its inventory management, particularly on printed circuit board components.

• Our FY23F revenue of RM4.8bil is in line with management guidance range of RM4.5bil to RM4.8bil. While we expect its coffee brewer and US-based clients’ revenue to trend lower, increasing orders from customers X and Y may be able to offset the declines.

• Notably, the group has received 4 additional models for assembly from customer X, in which production is expected to double from the existing level. This has been incorporated into our FY23F assumption.

• In terms of the independent review on labour practices by PwC Consulting, the group highlighted that the results of the audit should be available by mid-July. We do not expect any surprises as the group has been proactive in updating ESG-related issues. Recall that the review commenced on 3 March 2022 with completion expected in 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 a stagflationary outlook, leading to weaker demand for discretionary goods.

Source: AmInvest Research - 1 Jul 2022