PETALING JAYA: The electronics manufacturing services (EMS) industry has been gaining more attention from analysts of late, with two research houses having initiated coverage on the sector in the past month.
CGS-CIMB yesterday initiated coverage on the EMS industry, noting its growth potential with key earnings drivers coming up ahead.
Affin Hwang Capital Research (AHCR) had on Oct 10 also initiated coverage on the industry with an overweight rating, and noted that the industry is a beneficiary of the trade diversion and is seeing rapid expansion of its common key customer – a global renowned household appliances brand.
CGS-CIMB said it expected major earnings drivers coming from the strong sales growth of their key common customer, which saw a 2015-2018 revenue compounded annual growth rate (CAGR) of 36.2%, backed by strong end-demand and potential new product launches.
There is also potential new customer wins as a result of manufacturing diversions from the ongoing US-China trade tensions and potential margin expansion by pursuing higher value-added products, CGS-CIMB said.
“VSI, SKP and ATA form part of the backbone of a well-entrenched supply chain in Malaysia for a large common customer, a renowned global company best known for its aspirational home-care products, which we estimate to have accounted for more than 70% of VSI, SKP and ATA’s collective revenue in financial year 2019 (FY19), ” CGS-CIMB said.
“Our analysis shows that these EMS players have generated a FY16-FY19 revenue and net profit CAGR of 37.5% and 19.2%, respectively, driven predominantly by orders from its large common customer, ” it added.
AHCR, meanwhile, said that ATA is its preferred sector pick, as it expects the group to continue charting strong growth on the back of capacity expansion, coupled with margin enhancement from further vertical integration.
It has rated ATA a “buy” with a target price of RM1.80.
“We have also initiated coverage on VSI with a ‘buy’ rating and a target price of RM1.60, given the group’s diversified customer mix and strong ability in securing new contracts, which makes it a prime beneficiary of the trade diversion, ” AHCR said in its report.
CGS-CIMB added that the sector offered attractive valuations, superior operating margins and strong free cashflows.
“The sector is currently trading at 12.8 times the calendar year 2020 forecast price-to-earnings ratio (PER), a discount to its three-year mean PER of 13.7 times. On aggregate, we project a 9.4% net profit CAGR over FY19-FY22 for ATA, VSI and SKP, ” CGS-CIMB said.
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