EMS firms gear up for prospects of customers ramping up orders

DESPITE the blips caused by the lockdown restrictions, the electronics manufacturing services (EMS) sector is expected to overcome earnings disruption from lockdown restrictions with structural growth from supply chain reconfiguration.

Although the labour-intensive sector has been affected by the stricter lockdown since May 23, key customers of three prominent industry players – ATA IMS Bhd, SKP Resources Bhd and VS Industry Bhd – have continued to ramp up their orders, according to UOB Kay Hian Research.

“We expect a two-year core net profit compound annual growth rate (CAGR) of 18-39% for the trio,” projected analyst Desmond Chong in a EMS sector update. “Post disruptions, EMS players are now better prepared and are able to manage any earnings disruption.”

Retaining its “overweight” outlook on the sector, UOB Kay Hian Research noted that while ATA is still reaping the fruit from its trade diversion-related US customer, it expects some pushback in terms of delivery due to operational disruptions.

“Meanwhile, SKP has allocated capex of RM67 mil to expand its production capacity for its main customer,” observed the research house.

“For VSI, order visibility from its key customers remains strong as three of its customers are making VSI their preferred partner amid the set-up of new regional bases while VSI is aggressively pursuing opportunities with new potential customers.”

Moving forward, UOB Kay Hian said EMS players are seeing light at the end of the tunnel with a normalised workforce capacity as the Government has enabled a progressive relaxation of restrictions by allowing companies to resume full operations once 80% of their employees have been fully vaccinated.

“Note that SKP and VSI have completed the vaccination exercises for most of its employees and resumed production at full capacity as of our time of writing, while ATA is expected to achieve full vaccination rate for its employees by end-October,” noted the research house.

“In terms of earnings sensitivity, every 10 days of operational halt could affect the earnings of EMS players under our coverage by 10%-14%.”

Of the three EMS players, VS Industry is UOB Kay Hian’s top pick as it offers a better investment proposition than peers due to its exposure to strategic customers as well as being a clear winner of trade diversion.

“Its current valuation has been overly conservative in (i) assuming negative equity for its China operations while ignoring its valuable assets; and (ii) discounting equity gains from Seeing Machine Ltd,” opined the research house.

“The VS industry is back to its high-growth cycle, offering a two-year net profit CAGR of 26% (from FY2021 to FY2023) which is compelling even in comparison to its peak year in FY2021.” – Oct 8, 2021

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