VS Industry: Back to glory days

VS Industry plant in Senai

IN the past four months, shares of VS Industry Bhd had gone up by almost 56%, outperforming other “big boys” in the electronics manufacturing services (EMS) segment.

For comparison, ATA IMS Bhd rose by just 9.7% during the period, while SKP Resources Bhd and PIE Industrial Bhd were up by 17% and 25.4% respectively.

Despite the ongoing global chip shortage and production challenges, business has been robust for this beneficiary of the US-China trade diversion.

VS Industry has been enjoying stronger orders from its key clients, and the group has said several new product models are coming into production over the coming quarters.

The group, which is Asean’s top five EMS provider, has seen an improved bottom line for all three operating markets in the financial year of 2021 (FY21) ended July 31. The markets are Malaysia, Indonesia and China.

VS Industry recently reported a record net profit of RM245.34mil for FY21, which has more than doubled year-on-year (y-o-y). Revenue also increased by 23.4% y-o-y to RM4bil.

The Retirement Fund Inc or Kwap is the single largest shareholder of VS Industry, with a 11.2% stake.

Moving forward, the integrated EMS player should be able to continue its earnings growth momentum, riding on the ramp-up in production for its newer customers and a better product mix.

The two US-based customers secured in FY19 and FY20 could likely be driving the growth for the current financial year of 2022.

CGS-CIMB Research points out that the production for VS Industry’s newest US-based customer has commenced in August 2021.

“We expect VS Industry to still achieve a commendable revenue growth rate of 21.6% in FY22,” according to the brokerage.

“We estimate that sales to newer customers will garner better gross margins, leading to a better overall sales mix for the group in FY22,” according to the brokerage.

Despite its robust business and a diversified clientele, a key issue with VS Industry is its low net profit margins, which have been at low or mid-single digits.

In FY21, the net profit margin was 6.1%. While this is an improvement from the pre-pandemic 2019 level of 4.2%, it would not hurt to achieve a further increase.

Nevertheless, analysts think the margins will continue improving, especially with the sales to newer customers and a better overall sales mix.

Thanks to the US-China trade diversion, VS Industry has secured five new clients since 2019.

UOB Kay Hian Malaysia Research says VS Industry is still being approached by new multinational corporation customers, with discussions of prospective contracts at the early stages of evaluation.

“Based on the recent customer acquisition trend, we believe any prospective contracts could carry higher margins than those orders that VS Industry had lost previously.

“We have not accounted for any new customer-wins for now,” it says in a recent note.

The research house expects VS Industry’s net profit margin to improve to 6.9% in FY22 and 7% in FY23, amid a double-digit revenue growth for both years.

While VS Industry is busy ramping up its production volumes to cater to orders from existing customers, CGS-CIMB Research points out that VS Industry has been selective in courting new customers.

The preference is for higher-margin contracts.

“For its China operations, we note that the group has shifted its stance by freezing its asset monetisation plans and is instead focusing on selectively taking on new customers,” it says.

Overall, brokerages are largely upbeat about the EMS player’s prospects.

AmInvestment Bank Research recently upgraded its call to “buy”, following the announcement of VS Industry’s FY21 results.

The brokerage raised the core net earnings forecasts for FY22 and FY23 by 12% to 13% in order to reflect VS Industry’s improved margins.

“VS Industry’s FY21 core net earnings of RM270mil was an all-time high, coming in above our expectation but in line with the consensus’ estimates,” it says.

AmInvestment Bank Research is positive on VS Industry’s medium to long-term outlook, underpinned by five factors.

These are namely, the group’s strong order growth supported by key customers’ product launches, its ability to offer turnkey electronic manufacturing services solutions as a vertically integrated player, customer diversification efforts with opportunities arising from the US-China trade war diversion, the improving overseas operations underpinned by higher sales order from the group’s key Indonesian customer as well as effective costs rationalisation initiatives in China.

Meanwhile, PublicInvest Research has affirmed an “outperform” call on VS Industry, with a higher target price of RM1.86, compared with RM1.56 previously.

The new target price was based on a 20 times multiple to a rolled-over FY23 earnings, citing the longer-term horizon was appropriate, given the group’s multi-year growth trajectory.

It also raised FY22 and FY23 net profit forecasts by 3.9% and 7%, respectively, in anticipation of earlier-than-expected line commissioning for some of the company’s new customers.

Amid the slew of “buy” calls on VS Industry, one brokerage retained its “hold” recommendation, despite raising its target price by 9% to RM1.86 recently.

Maybank IB Research justified its “hold” call by saying that VS Industry’s risk-reward ratio is balanced in the medium-to-long run, pending materialisation of tangible growth catalysts.

Nevertheless, the research house says FY22 is shaping up to be a better year for VS Industry, after a “decent showing” in FY21.

“We introduce FY24 forecasts and have raised our FY22-FY23 earnings by 11% and 3% on the back of increased capacity utilisation from FY22 onwards.

“Provided there are no further disruptions to business activities moving forward, potential growth catalysts include higher volume loading and the introduction of new models from existing customers, as well as the onboarding of new ones,” it says.

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