Long-term growth prospects intact
? We see a stronger FY23F from an alleviation of supply chain disruptions and
a ramp-up of box-built assembly for newly-secured product models.
? While near-term sentiment could be weak due to concerns over demand
slowing down, we believe VSI’s long-term growth prospects are intact.
? We continue to like VSI for its diversified clientele and as it is a key
beneficiary of manufacturing diversions by OEM/brand owners.
Positive on alleviation of supply chain disruptions but…
To recap, VS Industry’s (VSI) 3QFY7/22 core net profit fell 30.6% yoy. At its recent
analyst briefing, VSI shared that the main reasons for this drop were i) supply chain
disruptions from labour and component shortages, which led to operational inefficiencies
and lower product deliveries to key customers as well as ii) suboptimal production levels
for its newest US-based customer, resulting in continued losses for this line. On the
labour front, VSI received a new batch of 1k workers in May-Jun 2022 and is targeting to
bring in an additional 2.7k workers by end-Sep 2022. This should lead to sequentially
stronger sales as well as margin accretion from better utilisation rates, in our view. The
additional batches of workers should be sufficient to cater for most of its secured orders
going forward, notwithstanding worsening component shortages.
… cautious given potential demand slowdowns
We dial back our revenue growth assumptions for FY23-34F based on VSI’s current
guidance as the group remains cautious on potential end-demand slowdown for a few of
its key clientele that serve the mass market segments. Nevertheless, the group still
anticipates healthy demand growth from two of its key customers, Customer X and
Customer Y, having secured new product models from these customers in CY21. Our
channel checks reveal that end-demand for Customer X’s products remains robust
despite inflationary pressures, which serves as a testament to the customer’s strong
branding coupled with its premium/luxury target market.
VSI remains a key beneficiary of manufacturing diversions
We reduce our FY23/24F core EPS by 9.8/11.6% as we dial back our order growth
assumptions for VSI’s US-based customer and coffee brewer customer. Our TP
moderates to RM1.21, still based on 15.7x CY23F P/E, in line with mean. Nevertheless,
we still forecast EPS growth of 42%/38% for FY23/24F, primarily owing to a ramp-up of
box-built assembly for new product models for Customers X and Y as well as margin
accretion from higher utilisation rates at its facilities post a full replenishment of its
workforce going into FY23F. We believe VSI is still a key beneficiary of manufacturing
diversions by OEM/brand owners exploring a diversification of their manufacturing bases.
While we see weaker near-term sentiment for the stock owing to concerns over
inflationary pressures amid the rising interest rate environment, we believe there is
limited downside to the share price as most of the negatives have been priced into its
valuations at this juncture. Reiterate Add.