Results in-line; Maintain HOLD
VSI 9MFY22 results came in within our expectations but missed the street’s
estimates, making up 73%/67% of ours/consensus’ full-year forecasts
respectively. We maintain our earnings assumptions and TP of MYR1.07,
derived by pegging its fully-diluted FY23E EPS of 6.4 sen to a PER multiple
of 16.7x, in-line with the company’s 5-year historical PER mean. The
company’s near-term outlook is weighed down by on-going labour issues,
raw material shortages and increasing cost pressures. However, we believe
the light at the end of the tunnel is near, with the arrival of foreign labour
in 4QFY22. We prefer ATECH (BUY, TP: MYR2.03) for our EMS pick.
Labour and component shortages dragged sales
VSI’s 9MFY22 core net profit (CNP) came in at MYR134m (-35% YoY). The
earnings contraction was mainly down to lower order deliveries due to
labour/component shortages and higher depreciation costs. Meanwhile, its
3QFY22 CNP of MYR53m (+24% QoQ, -28% YoY) came in higher QoQ despite
lower revenue (-9% QoQ, -14% YoY), thanks to improving margins
attributable to a more favourable product sales mix.
Diseconomies of scale hurting profitability
Zooming in on its geographical performance, Malaysia segment’s 9MFY22
revenue shrank by 3% YoY as order deliveries reduced, hampered by
shortages in labour and components. Likewise, PBT slumped by a larger
37% YoY due to diseconomies of scale and higher input costs (ie. labour
costs, raw material costs and depreciation costs have all increased). The
Indonesia and China segments remained lacklustre, as a result of lower
sales orders and diseconomies of scale respectively.
Rising costs and inflation headwinds ahead
While we believe VSI’s labour shortage concerns will start to ease with the
arrival of foreign workers in the coming quarter, its recovery process from
the operational disruptions could be bumpy as rising costs and inflationary
pressures are likely to affect its near-term margins and dampen consumer
demand for the premium consumer electronic products it assembles,
respectively. Hence, we maintain our HOLD recommendation for VSI.