V.S. Industry - Delayed margin recovery

Price Target: 
Price Call: 
Last Price: 
+0.135 (17.65%)

Investment Highlights

  • 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.

Source: AmInvest Research - 23 Mar 2023

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