AFTER a 39% year-to-date share price plunge, value has emerged in the electronics manufacturing service (EMS) outfit VS Industry Bhd.
According to UOB Kay Hian Research, the Johor-based company is currently trading at 7.3 times FY2023 ex-cash fixed deposit price-to-earnings ratio (PE) which is at -2SD (standard deviation) below its five-year mean fully diluted PE (after warrants conversion and ex-cash injection).
“We believe the group’s value proposition is even more attractive now due to (i) its two-year net profit compound annual growth rate (CAGR) of 19% (from FY2021-2023) even from its peak year in FY2021; (ii) it being on the verge of securing more orders from the US-China trade diversion; and (iii) the Malaysian border re-opening,” opined analyst Desmond Chong in a company update.
Moving forward UOB Kay Hian Research expects VS Industry to benefit from electrical appliance giant Dyson terminating its production contract with EMS peer ATA IMS Bhd which will come into effect in June.
“In the worst-case scenario, this EMS player could lose around 83% of its FY2023 revenue or RM3.6 bil (our previous assumption),” projected the research house. “With this common main customer of VS remaining committed to a huge investment, the group could stand to benefit by different magnitudes imminently.”
While there is no definitive agreement as yet on the portion of allocation, UOB Kay Hian expects contract manufacturer(s) to take up at least two major new lines to operate efficiently based on the historical order bidding trends.
“For illustration purposes, assuming RM3.6 bil in orders were given out evenly to five other contract manufacturers, each could get around RM750 mil worth of orders,” reckoned the research house.
“Based on our back-of-the-envelope calculations, should VS secure RM750 mil in orders for FY2023 individually, the earnings potential could be RM45 mil (accretion of 13% earnings).”
All-in-all, UOB Kay Hian Research retained its “buy” stance on VS Industry with a lower sum-of-parts (SOP)-based target price of RM1.60.
“We have lowered our ascribed PE of 22 times to 17 times being its (VS Industry) five-year average forward PE mean on FY2023 earnings per share (EPS) to account for the PE multiple compression,” noted the research house.
“We have also assumed full warrants conversion which resulted in an enlarged share price alongside cash per share from the warrants conversion.”
Above all else, UOB Kay Hian Research reckoned that VS Industry offers a better investment proposition compared with peers due to its exposure to strategic customers as well as it being the clear winner in terms of trade diversion.
“This is proven by its latest sizeable order wins from its new customers. We see the strategic move of embarking on a diversification strategy to broaden its customer profile as a plus point,” the research house pointed out.
“Meanwhile, the current valuation has been overly conservative in assuming negative equity for its China operations while ignoring its valuable assets.”
At the close of today’s mid-day trading, VS Industry was up 4 sen or 4.76% to 88 sen with 17.49 million shares traded, thus valuing the company at RM3.37 bil. – March 9, 2022
