Expecting stronger quarters ahead
- VSI’s FY4/22 core EPS (-21.4% yoy) was above expectations, due mainly to lower taxes and higher profits from subsidiaries.
- We expect stronger qoq 1QFY23F, from a ramp-up of box-built assembly for new product models and margin accretions from an influx of workers.
- Reiterate Add, with an unchanged TP of RM1.21 (15.7x CY23F P/E).
FY4/22 core EPS and DPS ahead of expectations
VS Industry (VSI) reported a FY4/22 core net profit of RM215m, excluding one-off impairments totaling RM38.2m and PPE disposal losses of RM8.9m. We deem this as above expectations as it made up 118%/115% of our/Bloomberg consensus’ forecasts, due to lower tax expenses owing to lower taxable income from the previously mentioned one-off items, coupled with stronger profits from its subsidiaries. FY4/22 core net profit fell 21.4% yoy due to operational inefficiencies from: 1) a scarcity-led rise in raw material and labour costs, 2) higher depreciation costs from its new facilities, and 3) continued suboptimal production levels for its new key customer, which commenced in 1QFY22. A fourth interim DPS of 0.4 sen and a final dividend of 0.4 sen were announced, bringing FY22 DPS to 2.0 sen (FY21: 4.2 sen), above our expectations of 1.6 sen.
Malaysia segment kept earnings afloat
4QFY4/22 sales grew 6.7% yoy and 8.3% qoq, causing core net profit to jump 18.5% yoy and 62.1% qoq to RM82m. This was mainly due to stronger order deliveries to its key customers for its Malaysia segment. Additionally, we reckon VSI also benefitted from an easing of supply chain disruptions following a gradual replenishment of its workforce and gradual abatement of component shortages, which had led to a core PBT (excluding oneoff impairments) margin expansion of 2.9% pts yoy and 1.1% pts qoq for its Malaysia segment. On a reported net basis, 4QFY22 net profit came in at RM34.6m, owing mainly to a RM25.8m impairment of investment in associate (which we reckon relates to its investment in NEP Holdings), RM12.4m for impairment on PPE and RM8.9m disposal losses on PPE, both of which were for its China division.
Worker replenishment to lead to sequentially stronger quarters
We largely retain our core EPS forecasts and RM1.21 TP (based on 15.7x CY23F P/E, in line with its 5-year historical mean) pending VSI’s results briefing on 29 Sep 2022. Nevertheless, we anticipate stronger quarters from 1QFY23F onwards, on: i) a ramp-up of box-built assembly for new product models for Customers X and Y, as well as ii) margin accretions from higher utilisation rates at its facilities, post a full replenishment of its workforce going into 1QFY23F. We continue to like VSI for its diversified clientele and as a key and proven beneficiary of manufacturing diversions from OEM/brand owners. VSI trades at an attractive 12M forward P/E of 12x, which is close to 1 s.d. below its 5-year mean. The securing of new clients is a key potential re-rating catalyst. Downside risks include lower-than-expected end-demand for its products and higher learning curve costs for production works for new customers.