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Analysts see rosy earnings outlook for VS (6963) V.S INDUSTRY BHD driven by strong product demand

KUALA LUMPUR (June 16): Analysts see a rosy earnings outlook for VS Industry Bhd, underpinned by strong product demand, after the group beat expectations with a record high profit for the cumulative nine months ended April 30, 2021 (9MFY21).

RHB Research Institute’s analyst Soong Wei Siang said in a note today that VS Industry’s 9MFY21 results beat expectations owing to a better-than-expected product margin.

“We foresee exciting earnings growth prospects underpinned by progressive roll-out of new production lines moving forward.

“This is on the back of robust demand for consumer electronics globally and opportunity from trade war diversion,” he said.

Considering the sustainable earnings upcycle and 3-year earnings compound annual growth rate (CAGR) of 43% ahead, he believed VS Industry’s current valuation is “attractive”.

Thus, he upgraded the stock to buy call from neutral and revised up its target price (TP) to RM1.65 from RM1.47 nothing that this translated into 18% upside and about 3% yield for FY22.

While the group’s 4QFY21 performance could be marred by the latest round of lockdown enforcement as workforce capacity has been reduced in adherence, Soong gathered that the demand across key customers has remained robust and there are more production lines scheduled to be rolled out in upcoming quarters.

“Essentially, we forecast 21% earnings growth in FY22, as the earnings would scale greater heights when the two new customers secured earlier in 2020 contribute progressively once the production lines are set up and ramped up,” he said.

Apart from the earnings accretion, he noted, VS Industry’s customer stream will also become more diversified as a result, in turn gradually reducing the concentration risks.

Meanwhile, Hong Leong Investment Bank Research’s analyst Syifaa’ Mahsuri Ismail said in a note today, VS Industry’s 9MFY21 core profit after tax and minority interests (PATAMI) of RM207.2 million exceeded her and consensus expectations.

The strong performance was thanks to better-than-expected top line and earnings before interest, taxes, depreciation and amortisation (EBITDA) margin improvement, she added.

Despite seasonal weakness, she said VS Industry recorded a quarterly core PATAMI improvement of 8.2% quarter-on-quarter attributable to higher sales orders from existing customers.

Its EBITDA margin also improved 5 percentage point (ppt) year on year leveraging on better product mix with diversified customers, she added.  

“We remain positive on VS Industry’s long-term prospects brought by the steady demand of consumer electronic products from homebound populations.

“We reckon earnings outlook to be in expansionary supported by increasing sales orders from main customers,” she said.

She also noted that the improvement in margin is worth highlighting thanks to the group’s proactive effort in diversifying its product portfolio.

“We gather that the new 300,000 square feet facility for Customer Y (newly secured in Oct 2020) at i-Park Senai Airport City is facing some delays in completion on the back of stalled construction works with full movement control order restrictions.

“However, we reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully,” she said.

She reaffirmed buy call on VS Industry with an unchanged TP of RM1.72, as she likes the group for its multi-year growth trajectory from existing customers coupled with the proven capability to secure more projects that yield higher margins in the future.

“We view that the higher premium is justifiable given the healthy order outlook brought by the steady demand of consumer electronic products; and margin expansion from customer diversification efforts.

“As the biggest electronic manufacturing services player in Malaysia with a solid track record, we opine that VS Industry is prime beneficiary from the intensifying trade diversion catalyst,” she said.

UOB KayHian’s analyst Desmond Chong also said in a note today, VS Industry’s 9MFY21 core net profit of RM205.6 million made up 84% and 87% of his and consensus expectation.

According to him, the positive deviation was on the back of an impressive core net margin of 6.8% in 3QFY21, driven by a favourable product mix with the emergence of new customers and lucrative trade diversion-related contract.

He increased VS Industry FY21 earnings forecast by 6% to account for higher net profit margin assumption of 0.3 ppt, but lower its revenue assumption by 2% to account for the workforce restriction.

He noted that VS Industry record 3QFY21 results on the back of impressive margins reflect the continual fruition from the restructuring that started in 2019.

“Order commitment from key customers remains intact with some making VS Industry the preferred partner in Asia by loading up massive volumes.

“VS Industry’s glory days are back with a high-growth cycle and a three-year net profit CAGR of 28% even from its peak year,” he said.

He maintained buy on VS Industry with an unchanged TP of RM1.90.

He said, VS Industry offers a better investment proposition compared with peers, due to its exposure to strategic customers as well as it being the clear winner of the trade diversion.

“This is proven by its latest sizeable order wins from its new customers. We see the strategic move of embarking on a diversification strategy to broaden its customer profile as a plus point,” he said.

He also noted, the group’s current valuation has been overly conservative in assuming negative equity for its China operations, while ignoring its valuable assets.

At the time of writing, VS Industry rose 6 sen or 4.29% to RM1.46, valuing the group at RM5.35 billion. The counter saw 16.67 million shares traded.


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