MAYBANK IB Research has turned cautious over VS Industry Bhd’s near term outlook amid rising costs and inflation headwinds ahead, prompting the research house to downgrade the electronic manufacturing service (EMS) provider to “hold” (from “buy” previously) with a lower target price of RM1.07 (from RM1.73 previously).
While additional foreign labour is expected to arrive in the coming months, thus easing labour shortage pressures on the company, Maybank IB Research is wary that VS Industry will continue to be hit by higher labour and raw material cost in FY7/2022E (after imputing the time lag in its cost pass-through mechanism).
“Beyond FY7/2022E, industry prospects have turned gloomy on the back of rising inflationary pressures which could affect consumer demand for the premium consumer electronic products assembled by VS Industry,” justified analyst Loh Yan Jin in a results review.
According to Maybank IB Research, VS Industry’s 1H FY7/2022 core net profit came in at RM81 mil (-39% year-on-year) with the underperformance being mainly due to (i) lower orders for printed circuit board assembly (PCBA); (ii) components shortage; (iii) increased labour and raw material costs; and (iv) higher depreciation costs.
“Variance versus our forecast stemmed largely from lower-than-expected revenue which was thought to be due to components supply disruptions as well as labour shortage issue that has restricted the company’s ability to ramp up its new order capacity,” noted the research house.
However, RHB Research begged to differ, reckoning that VS Industry’s promising growth prospects remain intact – underpinned by robust order demand and cost pass-through mechanism to insulate EMS provider from rising costs environment despite its 1H FY7/2022 disappointment on higher raw material costs and supply chain constraints.
Reiterating its “buy” call on the company with a lower target price of RM1.26 (from RM1.85 previously), RHB Research expects VS Industry’s continuous expansion and growing track record in serving reputable customers to place it in a good position to secure new customers when supply constraints ease.
PublicInvest Research also maintained its “outperform” rating on the Johor-based company despite trimming its target price to RM1.20 (from RM1.40 previously)
The group’s share price had recently taken a hit due to renewed concerns over its laboor practices though we think it to have been largely overblown,” opined analyst Ching Weng Jin. “We see the current weakness as an opportune time for accumulation.”
Moving forward, the research house noted that the group has been expanding its capacity in recent quarters by having spent about RM150 mil, a reflection of healthy prospects ahead. Moreover, orders from key customers are also expected to remain healthy and robust.
“Mass production for some of its customers are expected to be ramped up once labour sufficiency issues are resolved which is expected soon when our international borders are re-opened. This will also be supplemented by the hiring of more local workers,” added PublicInvest Research.
At 9.454am, VS Industry was down 2 sen or 2% with 6.86 million shares traded, thus valuing the company at RM3.75 bil. – March 28, 2022
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