Worker welfare still a priority
? We remain positive on VSI post its investor update as we believe VS remains committed to resolving any potential issues/gaps in its labour practices.
? Our view on VSI’s long-term earnings growth prospects remains intact notwithstanding further supply chain disruptions.
Migrant worker rights specialist ends engagement with VS
In its recent briefing, VS Industry (VSI) addressed a media article regarding actions taken by migrant worker rights specialist, Mr. Andy Hall on ending his engagement with VSI. To recap, Andy Hall and VSI had previously entered into an engagement pertaining to VSI’s labour practices and the welfare of VSI’s workers. Their engagement resulted in VSI agreeing to hire an independent third-party auditor (to be jointly decided by both parties) to run a social compliance audit (based on the 11 International Labour Organization (ILO) indicators), specifically on recalibrated workers (a government programme that allows
companies to legally employ undocumented foreign workers from 6 Nov 2020 to 30 Jun 2022). We gather that the engagement ended as Andy Hall was dissatisfied with i) VSI appointing PwC Consulting to conduct the audit unilaterally, ii) VSI not sharing the full details of the audit methodology and findings with him, and iii) the length and the scope of the audit which included local workers instead of purely focusing on recalibrated workers.
An unfavourable development but…
In our view, the withdrawal of the engagement is an unfavourable development as it is likely to further aggravate the negative sentiment, specifically on ESG issues, plaguing the EMS sector’s valuations. Nevertheless, we believe VSI’s appointment of PwC Consulting to conduct a full-scale audit (on both local and foreign workers) into its labour practices serves as a testament to its commitment to uphold the welfare of its workers as well as identifying and addressing any gaps in terms of its labour practices. We believe any potential issues raised in the audit will allow VSI to address these gaps, which could serve as an unwritten certification that VSI’s labour practices have zero elements of forced labour. This will not only reduce the risk of loss of key customers, but could also serve as a strong re-rating catalyst for the stock, in our view.
Reiterate Add on undemanding valuations
We cut our FY7/22-24F EPS forecasts ahead of its 2QFY22F results as we pencil in weaker revenue growth and EBITDA margins mainly to reflect sales disruptions and inefficiencies owing to component and labour shortages. We retain our Add call, but lower our TP to RM1.41 as we peg our valuation to a lower 15.7x CY23F P/E (vs. 19x), in line with its 5-year historical mean P/E, in view of the weaker sentiment following i) the elevated concerns over ESG, ii) weaker sentiment in the global tech sector in a rising interest rate environment and iii) concerns over supply chain disruptions in the EMS sector. We remain positive on VSI’s earnings FY23-24Fgrowth prospects, and continue to like VSI for its diversified customer base as well as undemanding valuations (FY23- 24F P/E of 11.3x/9.0x, which is lower than 1.s.d below its 5-year mean.