ELECTRONIC manufacturing service (EMS) provider VS Industry Bhd’s near-term outlook will likely be weighed down by temporary headwinds such as labour and raw material shortages and increasing cost pressures.
Having said that, Maybank IB Research is hopeful that earnings should rebound quickly once labour and supply chain issues ease, and with successful costs pass-through (usually after some time lag).
“We prefer Aurelius Technologies Bhd (“buy”; target price: RM2.03) vs VS Industry for our EMS pick in view of its more resilient and robust earnings growth prospect, and low dependence on foreign labour,” suggested analyst Loh Yan Jin in a company update.
Maybank IB Research has maintained its “hold” rating on VS Industry with s target price of RM1.07, pegging the company’s FY7/2023E fully diluted earnings per share (EPS) of 6.4 sen to a price-to-earnings ratiom(PER) multiple of 16.7 times in-line with its five-year historical PER mean.
“We understand 400 foreign workers from Myanmar have arrived at VS Industry on end-May,” revealed the research house. “It is expecting to on-board another 3,000 workers who will arrive in batches through June-August (ie. to receive circa 1,000 workers each month).”
This is a slight delay as compared to the company’s previous guidance of putting in place all its manpower by June.
“That being said, we anticipate VS Industry’s 3Q FY7/2022 results to remain lacklustre with slow recovery from its 4Q onwards,” projected Maybank IB Research.
“There could also be one-off recruitment costs and levy of up to circa RM10 mil to be incurred in its 4Q FY7/22F and another circa RM6 mil in 1Q FY7/2023E (based on our new expectations of timeline for workers arrival).”
However, the research house does not expect this to affect VS Industry’s core net profit forecasts given its non-recurring nature.
“Assuming an additional workforce of 3,400, this will raise the company’s recurring labour costs by up to circa RM10 mil per month but the majority of these costs will be passed on to its customers,” Maybank IB Research pointed out.
Potential upside to Maybank IB Research’s forecast includes higher-than-expected revenue from ramped up production (as labour and raw material shortage issues ease) and improved margins from better economics of scales.
At 11.41am, VS Industry was down 5 sen or 4.76% to RM1 with 2.31 million shares traded, thus valuing the company at RM3.83 bil. – June 13, 2022
