• Maintain BUY, with new MYR1.49 TP from MYR1.38, 17% upside and c.3% FY25F (Jul) yield. We paid a visit to EMS companies under our coverage in Johor and came back feeling positive on the near-term sector earnings prospects, and learnt that VS Industry’s customer diversification agenda is gathering pace. The company’s explosive 3-year earnings CAGR of 28% will be underpinned by a significant market share gain facilitated by its expansion plan in the Philippines, progressive contributions from newly developed capabilities and new opportunities arising from the trade war diversion.

• First sight of the new capabilities. We visited the production lines of Liquid Silicone Rubber (LSR) and dipping – the key raw material and process for a product VSI is currently producing. Together with two other new capabilities the company has successfully developed, the content of internalised parts and processes will be increasing in the future, thereby capturing a higher profit margin and at the same time, the savings from transportation costs will be passed on to the customer. This also renders VSI more flexibility and competitiveness when participating in new job tenders. We learnt that the results of new job tenders by Customer X could be known by Aug/Sep 2024.

• More perspective of the Philippines ambition. We obtained more insight on the rationale and dynamics of its newly announced venture into the Philippines. Management views it as a strategic opportunity to grow its market share with Customer X and believes its superior expertise as well as track record will minimise execution risks. In addition, the asset-light model to be adopted in the initial stage of the venture would bring about lower fixed costs hence lower sales threshold (MYR300m) to breakeven. Meanwhile, an equity raising exercise to raise up to MYR534m has been initiated to fund the capex and working capital requirements estimated at MYR400-500m.

• Factoring in the contribution from the Philippines. Our base case assumes a muted earnings impact in FY25F with the initial start-up losses in 3QFY25F to be offset by the maiden earnings subsequently in 4QFY25F. We lift FY26F earnings by 18% as we pencil in MYR900m of sales contribution from its Philippines operations. Correspondingly, our TP rises to MYR1.49, based on an unchanged 19x 2025F P/E and includes a 2% ESG discount. The valuation is at +2SD from its 5-year mean and represents a premium over peer, SKP Resources (SKP MK, BUY, TP: MYR1.31) warranted by VSI’s larger market capitalisation and more exciting growth prospects.

• Risks to our recommendation include major delays in expansion plans and significant loss of market shares.

Source: RHB Research - 3 Jul 2024