CGS-CIMB downgrades VS Industry over fears of end-demand slowdown

SLOWING end-demand for consumer electronics given a potential global recession has prompted CGS-CIMB Research to downgrade electronic manufacturing service (EMS) service provider VS Industry Bhd to “hold” (from “buy” previously) with a lower target price of RM1.04 (from RM1.21 previously).

In light of this, the research house deemed the securing of new clients – especially for the group’s China operations – as a key potential re-rating catalyst.

“We see a stronger FY7/2023F from alleviation of supply chain disruptions and a ramp-up of box-built assembly for newly-secured product models,” projected analyst Nagulan Ravi in a company update.

“Nevertheless, VS Industry’s growth prospects could be moderated by potential end-demand slowdown for consumer electronics globally, in our view.”

To recap, VS Industry’s FY7/2022 core net profit fell 21.4% year-on-year (yoy). At its recent analyst briefing, it shared that the main reasons for this drop were (i) supply chain disruptions which led to operational inefficiencies and reduced product deliveries; (ii) sub-optimal 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 FY7/2023F vs FY7/2022 as (i) it has already received majority of the 3,700 foreign workers it intended to hire; and (ii) component shortages have now reached manageable levels.

“The 3,700 workers should be sufficient for all of its currently secured orders,” reckoned CGS-CIMB Research.

Elaborating on prospect, the research house said VS Industry is currently 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 – namely, Customer X and Customer Y – after having secured new product models from them,” noted CGS-CIMB Research.

“For Customer X, VS Industry benefited in a big way from manufacturing diversions following the customer’s contract termination with one of VS Industry’s peers; the three new models it secured from Customer X in 1H CY2022 were transferred from said peer,” observed CGS-CIMB Research.

“All-in-all, VS Industry expects manufacturing diversions from Customers X and Y to more than offset reduced orders from other key customers.”

At the close of today’s mid-day trading, VS industry was down 1.5 sen or 1.55% to 95.5 sen with 2.8 million shares traded, thus valuing the company at RM3.67 bil. – Oct 3, 2022

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