Weighing in slowdown in end-demand
- We see a stronger FY23F from alleviation of supply chain disruptions and a ramp-up of box-built assembly for newly-secured product models.
- Nevertheless, VSI’s growth prospects could be moderated by potential end-demand slowdown for consumer electronics globally, in our view.
- We downgrade VSI to a Hold, with a lower TP of RM1.04 (11.2x CY24F P/E, 1 s.d. below its 5-year historical mean) to reflect these concerns.
Positive on alleviation of supply chain disruptions but…
To recap, VS Industry’s (VSI) FY7/22 core net profit fell 21.4% yoy. At its recent analyst briefing, VSI shared that the main reasons for this drop were i) supply chain disruptions, which led to operational inefficiencies and reduced product deliveries, ii) suboptimal production levels for its newest US-based customer, and iii) higher depreciation expenses from its new factory. Going forward, the group estimates potentially higher utilisation rates in FY23F vs. FY22 as i) VSI has already received the majority of the 3.7k foreign workers it intended to hire, and ii) component shortages have now reached manageable levels. The 3.7k workers should be sufficient for all of its currently secured orders, in their view.
… cautious given potential end-demand slowdown
VSI is now guiding for a more cautious outlook owing to 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 them. For Customer X, VSI benefited in a big way from manufacturing diversions following the customer’s contract termination with one of VSI’s peers; the three new models it secured from Customer X in 1HCY22 were transferred from said peer. All in all, VSI expects manufacturing diversions from Customers X and Y to more than offset reduced orders from other key customers, which is a testament to VSI’s advantageous position as a diversified EMS player.
Downgrade to Hold on concerns over slowing end-demand
We still anticipate stronger quarters from 1QFY23F onwards on a ramp-up of box-built assembly for new product models for Customers X and Y and margin accretion from higher utilisation rates at its facilities post a full replenishment of its workforce going into 1QFY23F. Nevertheless, we reduce our FY23/24/25F core EPS by 1.2%/12.4%/11.3% as we i) dial back our order growth assumptions for its key customers (other than Customer X), and ii) reduce utilisation rates for its new factory at i-Park@Senai Airport City, which primarily caters to Customer Y. Our TP moderates to RM1.04, now pegged to 11.2x CY24F P/E, 1 s.d. below its historical 5-year mean (vs. 15.7x, 5-year mean previously). The discount to mean is mainly to reflect our concerns over slowing end-demand for consumer electronics given a potential global recession. In light of this, we downgrade VSI to a Hold call. The securing of new clients, especially for its China operations, is a key potential re-rating catalyst. Downside risks include lower-than-expected end-demand for its products.
