KUALA LUMPUR (March 31): Analysts have raised their respective target prices (TPs) for VS Industry Bhd (VSI) after the group’s earnings for the second quarter ended Jan 31, 2021 (2QFY21) came in within their expectations.
Inter-Pacific Research Sdn Bhd upgraded the stock to "trading buy" with a higher TP of RM3.10 (from RM3) by ascribing an unchanged target price-earnings ratio (PER) of 19 times to its forecast FY22 earnings per share (EPS) of 16.4 sen.
In a note today, Inter-Pacific Research analyst Diana Cheok said she expects a strong double-digit growth in VSI’s top line and bottom line, supported by robust order visibility from key customers in the consumer electronics industry.
Meanwhile, Hong Leong Investment Bank (HLIB) Research reiterated its "buy" call on the electronics manufacturing services (EMS) provider with a revised TP of RM3.44, from RM2.92, after lifting its price-to-earnings (P/E) multiple from 17 times to 20 times, pegged at calendar year 2022 (CY22) EPS.
“We view that the higher premium is justifiable given the healthy order outlook brought by steady demand for consumer electronic products and margin expansion from customer diversification efforts.
“As the biggest EMS player in Malaysia with a solid track record, we opine that VSI is on a trajectory to achieve new-high order value among intensifying trade diversion,” said HLIB analyst Syifaa’ Mahsuri Ismail.
CGS-CIMB Research also raised its TP for VSI to RM3.12, from RM3 previously, taking account the group’s longer-term revenue growth from its newly-secured clients.
“We keep our earnings forecasts intact and maintain our ‘add’ call on VSI, with a higher TP of RM3.12, as we roll over our valuation to an updated CY22F (from FY22F) P/E of 19 times (from 20 times) at an about 20% premium to its five-year mean P/E of 16 times to account for longer-term revenue growth from its newly-secured clients, which we see as key rerating catalysts.
“We like VSI for its targeted customer diversification strategy as it has proven to benefit from the manufacturing diversion from trade tensions,” said CGS-CIMB analyst Syazwan Aiman Sobri.
VSI’s net profit soared 92.17% to RM63.79 million for 2QFY21, compared with RM33.2 million a year earlier, mainly due to higher sales orders and a favourable product sales mix. Meanwhile, quarterly revenue grew 21.82% to RM999.31 million from RM820.33 million.
For the first half ended Jan 31, 2021 (1HFY21), the EMS provider’s net profit climbed 60.54% to a record high of RM130.47 million from RM81.27 million a year ago. Its revenue for the period rose 7.09% to RM1.99 billion from RM1.85 billion.
“VSI’s 1HFY21 revenue was in line with our forecast, accounting for 47.7% of our estimated full-year revenue. Net profit, however, exceeded our forecast by 8.1% following better-than-expected EBITDA (earnings before interest, taxes, depreciation and amortisation) margins,” said Inter-Pacific Research’s Cheok.
Moving forward, Inter-Pacific Research adjusted its revenue targets for the group higher by 1% to 2% to account for better top line growth from China and tweaked its EBITDA margin to a low double digit to reflect a favourable product mix and improved cost efficiency.
It added that its net profit forecasts were also tweaked higher by 4%-12% for FY21-FY22.
“Meanwhile, we also foresee improved profitability from the Indonesian unit due to better margins and its China business to record a smaller net loss this year after massive restructuring previously.
“On the flip side, we foresee a potential cut in order flows from a disinfectant manufacturer as the [Covid-19] pandemic recedes. As such, the sales were not imputed in our forecasts and any orders received are earnings-accretive, albeit not sizeable compared to sales from VSI’s existing key clients,” added Cheok.
HLIB’s Syifaa' said the research house is positive on the group’s long-term prospects, adding that it is upbeat that VSI’s business development team is still continuing its discussions on boarding new customers.
“Although still at an early stage of discussions, these should serve as growth catalysts for the group over the longer-term horizon,” she said.
CGS-CIMB’s Syazwan also opined that the order outlook for VSI’s key customers remains strong, with several new product models starting commercial production progressively in the coming quarters.
“As a result, it is currently aggressively expanding capacity to cater to its relatively more diversified customer base. We gather that its new facilities sitting on c.414k (about 414,000) sq ft of land in i-Park @ Senai Airport City, Johor are on track to be completed by mid-2021, which should allow it to cater to its customer which it secured in 2020,” Syazwan said.
At the time of writing today, shares in VSI had risen three sen or 1.06% to RM2.86, valuing the group at RM5.41 billion.