MALAYSIA’S electronic manufacturing sector (EMS) looks promising with CGS-CIMB Research flagging earnings upsides for SKP Resources Bhd and VS Industry Bhd, driven by a faster resolution to component shortages in the recent months (vs earlier expectations of alleviation only in 1Q CY2023F) leading to higher utilisation rates.
Following the termination of one of their peers – presumably ATA IMS Bhd – SKP and VS Industry have emerged as key beneficiaries, benefitting through order re-channelling and/or new product model wins from their key common customer, according to the research house.
“We note that while the risk of end-demand slowdowns for consumer electronics is apparent, this is largely offset by manufacturing diversions from OEM/brand owners looking to diversify their supply chains to the Southeast Asian (SEA) region, post the flurry of geopolitical tensions in recent years which began with US-China trade tensions back in 2018,” observed analyst Nagulan Ravi in a EMS sector update.
CGS-CIMB Research which retained its “overweight” outlook on the EMS sector had on Aug 11 hosted a group of institutional investors for a site visit to both Johor-based SKP and VS Industry.
The research house further gathered that both SKP and VS Industry are on track with their foreign worker recruitment plans, hence concluding the assimilation of 1,100 and 3,700 foreign workers respectively into their workforce by the end August-September 2022.
“A key surprise to us was the swiftness in the abatement of component shortages, mainly semiconductor shortages which we had initially forecasted to linger well into 1Q CY2023F,” noted CGS-CIMB Research. “Hence, we flag potential upside earnings risks for both SKP and VS Industry.”
On the ESG (environmental, social and governance) front, the research house said both SKP and VSI have already completed their social compliance audits with findings indicating that they have both fully reimbursed all recruitment fees paid by their foreign workers in the past.
“(They) are (also) on track to address or have already addressed all other minor remediable issues,” CGS-CIMB Research pointed out. “This should serve as a reassurance for their existing and prospective clients as well as the investing community with regard to their adherence to ethical labour practice.”
Reiterating an “add” rating and RM1.21 target price on VS Industry, the research house noted that it continues to like VS Industry for its diversified clientele and given that “it is a key and proven beneficiary of manufacturing diversions from OEM/brand owners”.
Also maintaining an “add” call on SKP with a target price of RM1.89, CGS-CIMB Research reckoned that the company’s key strengths lies in its balance sheet as it is currently in a net cash position with RM73 mil as of end-FY3/2022.
“As such, we believe that SKP will continue its dividend payout policy of 50% of distributable profit, implying healthy dividend yields of 3.5%-4.6% over FY3/2023-FY3/2025F,” added the research house. – Aug 19, 2022
