KUALA LUMPUR (June 16): Analysts see a rosy earnings outlook for VS Industry Bhd, underpinned by strong product demand, after the group beat expectations with a record high profit for the cumulative nine months ended April 30, 2021 (9MFY21).
RHB Research Institute analyst Soong Wei Siang said in a note today that VS Industry’s 9MFY21 results beat expectations owing to a better-than-expected product margin.
“We foresee exciting earnings growth prospects underpinned by progressive roll-outs of new production lines moving forward.
“This is on the back of robust demand for consumer electronics globally and opportunities from trade war diversion,” he said.
Considering the sustainable earnings upcycle and three-year earnings compound annual growth rate (CAGR) of 43% ahead, he believes VS Industry’s current valuation is “attractive”.
Thus, he upgraded the stock to a "buy" call from "neutral", and revised up his target price (TP) to RM1.65 from RM1.47, nothing that this translated into an 18% upside and about 3% yield for FY22.
While the group’s performance for the fourth quarter ending July 31, 2021 (4QFY21) could be marred by the latest round of lockdown enforcement as workforce capacity has been reduced in adherence, Soong gathered that demand across key customers remained robust and there are more production lines scheduled to be rolled out in the upcoming quarters.
“Essentially, we forecast a 21% earnings growth for FY22 as earnings would scale greater heights when the two new customers secured earlier in 2020 contribute progressively once the production lines are set up and ramped up,” he said.
Apart from the earnings accretion, he noted, VS Industry’s customer stream will also become more diversified as a result, in turn gradually reducing concentration risk.
Meanwhile, Hong Leong Investment Bank (HLIB) Research analyst Syifaa’ Mahsuri Ismail said in a note today that VS Industry’s 9MFY21 core profit after tax and minority interests (PATAMI) of RM207.2 million exceeded her and consensus expectations.
The strong performance was thanks to a better-than-expected top line and earnings before interest, taxes, depreciation and amortisation (EBITDA) margin improvement, she added.
Despite seasonal weakness, she said VS Industry recorded a quarterly core PATAMI improvement of 8.2% quarter-on-quarter (q-o-q), attributable to higher sales orders from existing customers.
Its EBITDA margin also improved five percentage points (ppts) year-on-year (y-o-y), leveraging a better product mix with diversified customers, she added.
“We remain positive on VS Industry’s long-term prospects brought by steady demand for consumer electronic products from homebound populations.
“We reckon the earnings outlook to be expansionary, supported by increasing sales orders from its main customers,” she said.
She also noted that the improvement in margin is worth highlighting, thanks to the group’s proactive effort in diversifying its product portfolio.
“We gather that the new 300,000 sq ft facility for Customer Y (newly secured in October 2020) at the i-Park @ Senai Airport City is facing some delays in completion on the back of stalled construction work with full movement control order (FMCO) restrictions.
“However, we reckon that this could be one of the biggest revenue contributors once production starts to ramp up fully,” she said.
She reaffirmed her "buy" call on VS Industry, with an unchanged TP of RM1.72, as she likes the group for its multi-year growth trajectory from existing customers, coupled with its proven capability to secure more projects that yield higher margins in the future.
“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 electronic manufacturing services player in Malaysia with a solid track record, we opine that VS Industry is a prime beneficiary of the intensifying trade diversion catalyst,” she said.
UOB Kay Hian analyst Desmond Chong also said in a note today that VS Industry’s 9MFY21 core net profit of RM205.6 million made up 84% and 87% of his and consensus expectations.
According to him, the positive deviation was on the back of an impressive core net margin of 6.8% for 3QFY21, driven by a favourable product mix, with the emergence of new customers and lucrative trade diversion-related contracts.
He increased his FY21 earnings forecast for VS Industry by 6% to account for a higher net profit margin assumption of 0.3 ppt, but lower his revenue assumption by 2% to account for the workforce restrictions.
He noted that VS Industry's record 3QFY21 results on the back of impressive margins reflect continual fruition from the restructuring that started in 2019.
“Order commitment from key customers remains intact, with some making VS Industry their preferred partner in Asia by loading up massive volumes.
“VS Industry’s glory days are back with a high-growth cycle and a three-year net profit CAGR of 28% even from its peak year,” he said.
He maintained "buy" on VS Industry, with an unchanged TP of RM1.90.
He said VS Industry offers a better investment proposition compared to its peers due to its exposure to strategic customers as well as with it being a clear winner of the trade diversion.
“This is proven by its latest sizeable order wins from its new customers. We see the strategic move of embarking on a diversification strategy to broaden its customer profile as a plus point,” he said.
He also noted that the group’s current valuation had been overly conservative in assuming negative equity for its China operations, while ignoring its valuable assets.
At the time of writing today, VS Industry had risen six sen or 4.29% to RM1.46, valuing the group at RM5.35 billion, with 16.67 million shares traded.