VS Industry earnings forecasts cut after 1Q earnings missed expectations

VS Industry earnings forecasts cut after 1Q earnings missed expectations
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KUALA LUMPUR (Dec 17): Earnings forecasts for VS Industry Bhd were lowered after its net profit for the first quarter ended Oct 31, 2021 (1QFY22) failed to meet analysts' expectations.

Affin Hwang Investment Bank research analyst Tan Jianyuan in a note on Friday (Dec 17) said that VS Industry's 1QFY22 core profit, which fell 43% quarter-on-quarter or 47% year-on-year to RM35 million, was a miss, comprising only 12% and 10% of his and the consensus estimates for the financial year ending July 31, 2022 (FY22).

“We cut our FY22 earnings forecast by 8% to RM284 million to reflect the weak 1QFY22 margin. [But] we expect stronger subsequent quarters on improving factory utilisation and operational leverage,” he said.

He also noted that his earnings forecasts of RM320.4 million for FY23 and RM362.4 million for FY24 are below the consensus as he earlier factored in higher compliance cost in relation to the company's migrant worker welfare as well as less bullish contract win assumptions.

He reiterated his "sell" call on VS Industry and revised down his target price (TP) to 98 sen from RM1.03.

“Our negative stance is premised on enhanced sector downside risks as existing/new customers deliberate over their stance on Malaysia after the recent issue faced by VS Industry’s peer.

“Moreover, earnings downside risks could arise from higher raw material and staff welfare compliance cost, in addition to current supply-chain disruptions,” he said.

In view of uncertainties arising from ongoing supply chain disruptions and some housekeeping adjustments, AmInvestment Bank Research, meanwhile, also reduced its revenue growth assumptions for VS Industry, lowering its core earnings forecasts by 29% to RM239.7 million for FY22, by 20% to RM336.9 million for FY23 and by 23% to RM354.1 million for FY24.

According to the research house, VS Industry’s 1QFY22 core earnings came in below expectations, accounting for 10% of its FY22 net profit forecast and 11% of the consensus.

This stemmed from lower orders for printed circuit board assembly from the company's key customers, coupled with continuous disruptions to component supply in Malaysia, the research house said.

However, it maintained its "buy" call on VS Industry with a TP of RM1.61.

“We remain positive on VS Industry’s longer-term outlook, underpinned by its: i) ability to offer turnkey electronic manufacturing services solutions as a vertically integrated player; ii) customer diversification efforts with opportunities arising from the US-China trade war diversion; and iii) improving overseas operations underpinned by higher sales orders from its Indonesian segment as well as improving cost rationalisation initiatives in China,” it said.

At 11.16am on Friday, VS Industry was one sen or 0.77% lower at RM1.29, valuing the group at RM4.94 billion.

Year to date, the counter had fallen 40.55%.

Read also:
VS Industry sees 40.9% fall in 1Q net profit to RM39.4m, declares 0.4 sen dividend

Surin Murugiah