PUBLICINVEST Research has summed up yesterday’s (March 3) slump in VS Industry Bhd’s stock price which emanated from migrant worker rights specialist Andy Hall’s withdrawal of his voluntary engagement most exquisitely.
“Both sides have merits to their arguments – one that appears to be based on broken promises, and the other based on a need to get a ‘clean bill of health’, hence is doing whatever deemed necessary for its own good,” wrote analyst Ching Weng Jin in a company update.
“Concerns, understandably, are overwhelming seeing as that a peer (ATA IMS Bhd) had its key customer cutting off ties (albeit with a six-month grace period) and causing a significant drop in earnings (and market capitalisation) despite constant assuages that ‘all was well, and under control’”.
To re-cap, Hall attributed his decision to walk out barely three months into their joint collaboration to VS Industry’s failure to honour its previous commitments made publicly to Bursa Malaysia and having unilaterally appointed an auditor to conduct an independent third-party social compliance without consulting him, among others.
Moving forward, PublicInvest Research expects the VS Industry management to have learned from that experience by taking the necessary measure to ensure the company is not exposed to such potential eventualities.
“We see significant share price weakness as opportune timing for accumulation,” reckoned the research house. “Negative sentiment notwithstanding, we continue to like the group’s long-term growth prospects and reiterate our “outperform” call.”
Nevertheless, PublicInvest Research slashed the company’s target price to RM1.40 (from RM1.86 previously) as “we cut multiples to 15 times (from 20 times previously) in line with its long-term average to also reflect the higher risk premium”.
Meanwhile, Hong Leong Investment Bank (HLIB) Research gathered that Hall’s decision to part ways with VS Industry was due to lack of common ground between both parties.
According to the research house, the management has shared that it has taken the crucial actions to amend the challenges by:
- Appointing a credible firm, PwC Consulting Associates (M) Sdn Bhd to conduct a third-party audit review of VS Industry’s labour practices;
- Ensuring that its audit review to be based on the 11 International Labour Organization (ILO) Indicators of Forced Labour;
- Supplementing the audit methodology by PwC Consulting with independent labour right experts and lawyers; and
- Providing an audit review on the whole scope of VS Industry’s employees, including local workers, foreign workers and newly absorbed workers under the Labour Recalibration Programme (LRP).
“We view this effort to take a thorough check on the labour welfare holistically (versus to only focus on LRP as suggested by Andy Hall) positively as this would enable the group to come clean and rectify any gaps under the long standing labour issue in the manufacturing sector,” noted analyst Syifaa’ Mahsuri Ismail.
All-in-all, HLIB Research retained its “buy” rating on VS Industry with an unchanged target price of RM1.78 based on 20 times CY2022 earnings per share (EPS).
“Following the recent sell down, the stock currently trading at an attractive 10 times FY2023 PE (price-to-earnings ratio) which is close to -1.5SD (standard deviation) below its five-year mean,” noted the research house.
“We like VS Industry given the (i) healthy order outlook brought by steady demand of consumer electronic products; and (ii) margin expansion from customer diversification efforts. As the biggest EMS player in Malaysia with solid track record, we opine that VS Industry is a prime beneficiary from the intensifying trade diversion theme.”
At 9.40am, VS Industry was up 3.5 sen or 3.65% with 7.35 million shares traded, thus valuing the company at RM3.81 bil. – March 4, 2022
Main photo credit: NST
