Analysts See Optimistic Profit Outlook for VS Industry Thanks to Strong Product Demand

KUALA LUMPUR (June 16): Analysts see good earnings outlook for VS Industry Bhd, supported by strong product demand, after the group beat expectations with record profit for the cumulative nine months ended April 30, 2021 (9MFY21).

RHB Research Institute analyst Soong Wei Siang said in a note today that VS Industry’s 9MFY21 results exceeded expectations due to a better-than-expected product margin.

“We anticipate exciting earnings growth prospects, supported by the gradual rollout of new production lines.

“This is because of the strong global demand for consumer electronics and the opportunities for trade war diversion,” he said.

Considering the sustained rise in earnings and the 3-year compound annual growth rate (CAGR) of earnings of 43%, he believes VS Industry’s current valuation is “attractive.”

So, he upped the stock to buy a call of neutral and revised his target price (TP) up to RM 1.65 from RM 1.47, just that translates into an 18% rise and a yield of around 3% for FY22.

While the performance of the 4QFY21 group could be marred by the latest round of lockdown applications as the workforce capacity was reduced in compliance, Soong concluded that demand among major customers remained robust and that more production lines are expected to be deployed in the coming quarters.

“Essentially, we forecast 21% profit growth in FY22 as profits would peak higher when the two new customers secured earlier in 2020 gradually contribute once production lines are installed and scaled up. power, ”he said.

Besides the increase in profits, he noted, VS Industry’s customer flow will also become more diversified as a result, which will gradually reduce concentration risks.

Meanwhile, Hong Leong Investment Bank Research analyst Syifaa ‘Mahsuri Ismail said in a note today that VS Industry 9MFY21’s basic profit after tax and minority interest (PATAMI) of RM207.2 million has exceeded consensus expectations.

This strong performance is due to improved profit margin and better than expected earnings before interest, taxes, depreciation and amortization (EBITDA), she added.

Despite the seasonal weakness, she said VS Industry saw PATAMI’s quarterly improvement of 8.2% quarter-on-quarter, driven by higher orders from existing customers.

Its EBITDA margin also improved by 5 percentage points (ppt) year over year by leveraging a better product mix with diverse customers, she added.

“We remain positive on the long-term outlook for VS Industry thanks to the continued demand for consumer electronics products from people confined to the home.

“We believe the earnings outlook is expansionary, supported by increased orders from major customers,” she said.

She also noted that the improvement in the margin deserves to be highlighted thanks to the group’s proactive effort to diversify its product portfolio.

“We assume that the new 300,000 square foot facility for Client Y (newly secured in October 2020) at i-Park Senai Airport City faces completion delays due to stalled construction with full movement control order restrictions.

“However, we believe this could be one of the biggest contributors to income once production starts ramping up,” she said.

She reaffirmed the call to purchase to VS Industry with an unchanged TP of 1.72 RM, as she appreciates the group for its multi-year growth trajectory with its existing customers, associated with its proven ability to secure more projects generating higher margins in the future.

“We believe the higher premium is justifiable given the outlook for healthy orders brought about by continued demand for consumer electronics; and expansion of margins through customer diversification efforts.

“As the largest electronics manufacturing services player in Malaysia with strong track record, we believe VS Industry is the primary beneficiary of the intensified trade diversion catalyst,” she said.

UOB KayHian analyst Desmond Chong also said in a note today that VS Industry’s 9MFY21 baseline net profit of RM 205.6 million was 84% ​​and 87% of his expectations and consensus.

According to him, the positive difference can be explained by an impressive net basic margin of 6.8% at 3TFY21, driven by a favorable product mix with the emergence of new customers and a lucrative contract linked to trade diversion.

It increased VS Industry FY21’s profit forecast by 6% to account for a higher net profit margin assumption of 0.3 ppt, but lowered its revenue assumption by 2% to account for the restriction of labor.

He noted that VS Industry 3QFY21’s record results on the back of impressive margins reflect the continued realization of the restructuring that began in 2019.

“The order commitment from key customers remains intact, with some making VS Industry the preferred partner in Asia by loading massive volumes.

“VS Industry’s glory days are back with a high growth cycle and a three-year net income CAGR of 28%, even from its peak year,” he said.

He maintained the purchase on VS Industry with an unchanged TP of RM 1.90.

He said that VS Industry offers a better investment proposition compared to its peers, due to its exposure to strategic clients and the fact that it is clearly the winner of trade diversion.

“This is proven by its last major orders won by its new customers. We see the strategic decision to embark on a diversification strategy to broaden its client profile as a positive point, ”he said.

He also noted that the group’s current valuation has been overly cautious in assuming negative equity for its China operations, while ignoring its valuable assets.

As of this writing, VS Industry has risen 6 sen or 4.29% to RM 1.46, valuing the group at RM 5.35 billion. The counter saw 16.67 million shares traded.

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