Pass (but with room for improvement)
No evidence of systemic forced labour practices
The independent review of VSI’s labour practices by PWC has finally concluded, with no evidence of systemic forced labour practices identified. 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 5Y historical PER mean. We prefer ATECH (BUY, TP: MYR2.03) as our top EMS pick.
To improve on accommodation and communication
To recap, the review was a holistic labour practice assessment carried out jointly by PWC and a labour rights consultant, among others, including to examine any potential forced labour conducts within the group, based on the 11 indicators by the International Labour Organization (ILO). While there are no major red flags identified, some areas for improvement were highlighted, namely, matters relating to recruitment fees, accommodation and effective communication. Remediation plans were carried out to
rectify the issues – VSI has fully reimbursed the recruitment fees paid by workers who joined prior to 2017, and its existing workforce no longer has workers hired through third-party subcontractors.
Positive outcome offset by recession fears
The favourable review findings are a positive development for VSI. The outcome of the review will help alleviate investor concerns relating to the group’s labour-associated risks. Nevertheless, we are not expecting this to have a substantial impact on the group’s valuation at this juncture, as the stock’s risk premium has risen on account of growing fears of recession. As a reference, SKP Resources’ (VSI’s other local peer, non-rated) share price has since moderated and is now trading -3% lower vs. the day before its announcement of a clean review completion, despite a short-term uptick of +6% in share price in the week after the announcement.
Remain neutral given the mixed outlook ahead
VSI is recovering from its labour-related operational disruptions. Apart from the review completion, it has also onboarded c.1,000 foreign workers recently, with expectation to bring in another 2,700 foreign workers by September. While this can finally ease the labour shortage bottleneck, overhangs remain relating to inflationary pressures and growing fears of recession, which could affect its near-term margins and dampen consumer demand for the consumer electronic products it assembles, respectively.