We downgrade V.S. Industry (VSI) to HOLD (from BUY) with a lower fair value of RM0.90/share (from RM1.05/share), based on a lower CY23F (from FY23F) EPS and target PE of 15x (from 16x) (Exhibit 3), in line with the company’s 5- year historical average.
Our reduced CY23F target PE stems from a less-sanguine revised earnings recovery projection with no adjustment to our neutral 3-star ESG rating.
VSI’s 6MFY23 core earnings of RM107mil (+29% YoY) fell short of our and consensus expectations, accounting for only 41% of our full-year FY23F estimate and 43% of consensus.
The negative variance is mainly attributed to slower-than-expected recovery of the group’s gross margin (10% in 6MFY23 vs. our earlier FY23F assumption of 11.5%).
Therefore, we cut our FY23F-FY25F earnings by 19% to reflect a more gradual gross margin recovery. We exclude the lumpy RM19.8mil forex loss from our core earnings calculation.
While foreign currency transactions are part of the group’s core operation, we view the sharp strengthening of RM against US$ during 2QFY23 as a non-recurring event.
Nevertheless, the group’s sales recovery trajectory remains intact. 6MFY23 revenue of RM2,441mil (+23% YoY) is within expectations, accounting for 52% of our full-year estimate. The higher revenue mainly stems from the continuous production ramp-up following the arrival of additional migrant workers.
The company’s 2QFY23 earnings grew 13% compared to a low base last year, which was affected by sub-optimal production levels, exacerbated by higher labour and raw material cost.
The group’s earnings recovery trajectory will be supported by VSI’s customers launching new models, which will be mostly slanted towards 2HCY23. Besides that, robust orders from customer X are expected to help offset potentially weaker demand from mid-tier customers.
Meanwhile, customer Y’s supply chain consolidation activity may benefit VSI as it would translate into a bigger wallet share and an improvement in utilisation rates.
Even so, the stock looks unattractive at this level, trading at a FY24F PE of 15.8x, just above its 5-year average of 15x.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....