Softer and subdued biz prospect clouds VS Industry’s near-term outlook

ELECTRONICS manufacturing services (EMS) provider VS Industry Bhd (VSI) has to brace for a slowdown in order that would impact both its revenue and net earnings for the rest of its financial year ending July 31, 2023 (FY7/2023).

Maybank IB Research has remained cautious on VSI’s outlook as it expects demand for consumer electronic products to remain muted on prolonged global economic challenges as evident the group’s 3Q FY7/2023 core net profit (CNP) which contracted by 39% year-on-year (yoy) to RM28 mil despite an 8% rise in revenue to RM996.78 mil.

“Quarter-on-quarter (qoq), its 3Q FY7/2023 CNP fell 44% from lower sales orders, leading to sub-optimal capacity utilisation, hence dragging margins,” observed analyst Loh Yan Jinin a results review.

“(However), VSI’s 9M FY7/2023 CNP grew by 20% yoy to RM142 mil from a low base as the group recovers from the pandemic-induced disruptions.”

Until production volume and factory utilisation pick up, Maybank IB Research expects the group’s margin to remain under pressure due to inefficient operating leverage.

As such, the research house has reiterated its “hold” call on VSI on the lack of re-rating catalysts. “Our preferred exposure in the EMS sector is Aurelius Technologies Bhd (“buy”; target price: RM3.90),” noted Maybank IB Research.

Elsewhere, Hong Leong Investment Bank (HLIB) Research also maintained a similar “hold” rating on VSI with an unchanged target price of 88 sen pegged to 16 times its FY7/2023 earnings per share (EPS).

“We reiterate our call in view of the volatile market climate and cautious demand,” justified analyst Syifaa’ Mahsuri Ismail. “We remain wary as demand from major brand owners could still be subdued given the recessionary fears and subdued consumer sentiment.”

As guided previously, HLIB Research said VSI expects its US customer as well as coffee brewer and pool cleaning customers to chart softer numbers on the back of recessionary fears.

“In addition to the risk of downward order revision from these customers, we gather that the order outlook from Customer X has also started to dwindle,” revealed the research house. “What was thought to be the anchor for the group earnings, the outlook is now turning south as the demand for some of Customer X’s products has started to weakened signs.”

Added HLIB Research: “We gather that Customer X, the US customer as well as the pool cleaner and coffee brewer are now running at marginally above breakeven point while Customer Y’s plant is severely underutilised.”

At 10am, VSI was up 0.5 sen or 0.59% to 85 sen with 5.34 million shares traded, thus valuing the company at RM3.28 bil. – June 16, 2023

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