VS Industry: Back to the glory days

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DURING the past four months, the actions of VS Industry Bhd had increased by nearly 56%, outperforming other “big boys” in the electronics manufacturing services (EMS) segment.

For comparison, ATA IMS Bhd grew only 9.7% during the period, while SKP Resources Bhd and PIE Industrial Bhd increased by 17% and 25.4% respectively.

Despite the current global chip shortage and production challenges, business has been strong for this recipient of U.S.-China trade diversion.

VS Industry has recorded larger orders from its main customers and the group has stated that several new product models will go into production in the coming quarters.

The group, which is Asean’s five largest EMS supplier, recorded improved results for all three operational markets during fiscal year 2021 (FY21) ended July 31. The markets are Malaysia, Indonesia and China.

VS Industry recently reported a record FY21 net profit of RM 245.34 million, which more than doubled year-over-year (year-on-year). Revenue also increased 23.4% year-on-year at RM4bil.

The Retirement Fund Inc or Kwap is the largest shareholder of VS Industry, with an 11.2% stake.

In the future, the integrated player in EMS should be able to continue its profit growth dynamic, by relying on the ramp-up of production for its new customers and a better product mix.

The two US-based clients secured in FY19 and F20 could likely be the growth driver for current FY2022.

CGS-CIMB Research points out that production of VS Industry’s newest US customer began in August 2021.

“We expect VS Industry to consistently achieve a commendable 21.6% revenue growth rate in fiscal 22,” according to the brokerage firm.

“We believe that sales to new customers will generate better gross margins, which will lead to a better overall sales mix for the group in fiscal year 22,” according to the brokerage.

Despite its robust business and diverse customer base, a key issue with VS Industry is its low net profit margins, which have been low to mid-range.

In FY21, the net profit margin was 6.1%. While this is an improvement from the 4.2% level before the 2019 pandemic, it wouldn’t hurt to get another increase.

Nonetheless, analysts believe margins will continue to improve, especially with sales to new customers and a better overall sales mix.

Thanks to the diversion of trade between the United States and China, VS Industry has secured five new customers since 2019.

UOB Kay Hian Malaysia Research reports that VS Industry is always approached by new clients from multinational companies, with discussions of potential contracts in the early stages of assessment.

“Based on the recent customer acquisition trend, we believe that any potential contract could generate higher margins than the orders that VS Industry had previously lost.

“We have not counted any new customers so far,” he said in a recent note.

The research house expects VS Industry’s net profit margin to improve to 6.9% in fiscal 22 and to 7% in fiscal 23, against a backdrop of growing double-digit income for both years.

While VS Industry is busy increasing its production volumes to meet orders from existing customers, CGS-CIMB Research emphasizes that VS Industry has been selective in finding new customers.

The preference goes to contracts with a higher margin.

“For its operations in China, we note that the group has changed its position by freezing its asset monetization plans and instead focuses on the selective acquisition of new customers,” he said.

Overall, brokerages are largely optimistic about the outlook for the EMS player.

AmInvestment Bank Research recently updated its call to “buy” following the announcement of VS Industry’s FY21 results.

The brokerage raised the baseline net profit forecast for fiscal 22 and 23 from 12% to 13% to reflect improved margins for VS Industry.

“VS Industry’s basic net profit for FY21 of RM 270 million was an all time high, exceeding our expectations but in line with consensus estimates,” he said.

AmInvestment Bank Research is positive on the medium to long term outlook for VS Industry, supported by five factors.

These include the strong growth in the group’s orders supported by product launches from key customers, its ability to offer turnkey electronics manufacturing service solutions as a vertically integrated player, and the diversification efforts of customers with opportunities stemming from the diversion of the US-China trade war, improved overseas operations supported by an increase in orders from the group’s main Indonesian customer as well as effective cost rationalization initiatives in China.

Meanwhile, PublicInvest Research has confirmed an “outperformance” call on VS Industry, with a higher target price of RM 1.86, compared to RM 1.56 previously.

The new price target was based on a multiple of 20 of year 23 earnings, citing the longer-term horizon was appropriate given the group’s multi-year growth path.

It also raised the net profit forecast for fiscal 22 and 23 by 3.9% and 7%, respectively, in anticipation of an earlier-than-expected commissioning for some of the company‘s new customers.

Amid the flurry of “buy” calls to VS Industry, one brokerage has kept its “hold” recommendation, despite a recent increase in its target price of 9% to RM 1.86.

Maybank IB Research justified its call “hold” by asserting that the risk-return ratio of VS Industry is balanced in the medium and long term, pending the materialization of tangible growth catalysts.

Nonetheless, the research house claims that FY22 is shaping up to be a better year for VS Industry, after a “decent performance” in FY21.

“We are forecasting for FY 24 and increased our earnings for FY 22 to 23 by 11% and 3% through increased capacity utilization from FY 22.

“Provided there are no more disruptions in business operations in the future, potential growth catalysts include higher volume loading and the introduction of new models from existing customers, as well as integration new ones, ”he says.


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