Incumbents In EMS Set To Gain Market Share

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The Electronic Manufacturing Services (EMS) sector Is near to mid-term positive as the incumbents are set to gain market share as its fast growth rate and entrenched fundamentals of the local EMS industry should continue to support robust job orders, an analyst told Business Today

RHB Research Analyst Soong Wei Siang said that enhanced efforts in maintaining high labour standards and ambition to diversify revenue streams will be key to sustaining the positive prospects.

A notable development in the industry yesterday was the shares of one of the players, ATA IMS Bhd slumped to its lowest level in six months on Thursday after British firm Dyson terminated its relationship with the electronics manufacturing firm over alleged labour practices. 

On this development, Soong said that this would likely lead to market share gain for the incumbents adding that it believes this is near- to mid-term positive for the EMS sector assuming the ensuing reallocation of ATA’s production lines to other existing contract manufacturers.

For illustration purposes, he said that it estimates VS Industry Bhd’s  FY23F (Jul) and SKP Resources’ FY23F (Mar) earnings to be lifted by 12% and 25% should the jobs be distributed evenly. 

Soong said that it understands that VS Industry presently has spare capacity to absorb the new jobs, but SKP Resources Bhd’s capacity is fully occupied until the expansion of new capacity by end-2022.

On a cautious note, Soong said that he is of the view that the termination may prompt the key customer to deconcentrate its exposure and dependence on Malaysian suppliers over a longer-term considering the heavy reliance on migrant workers and the potential emergence of labour issues that could pose risks to the key customer’s brand image and reputation.

He said that it believes the key customer’s fast growth pace after considering the diversification, is still strong enough to underpin the robust job flows for both VS Industry and SKP Resources to prosper.

In addition, he said that it is believed a total exit is unlikely at this juncture given the established supply chain in place as well as the expertise and multi-year track record of the Malaysia-based contract manufacturers.

On stock picks for the industry, Soong said in his paper said that it likes VS Industry’s diversification strategy is paying dividends and we look forward to the progressive volume ramp-up by the new major customers which will fuel FY22F growth of 39%. RHB has made a “Buy” recommendation of the stock and projected the share price to rise to RM2.01.

Meanwhile, it expects SKP Resources’ 2QFY22F earnings to record positive QoQ growth on the resumption of full workforce capacity and margin expansion from higher internalisation. Earnings growth beyond will be anchored by the commencement of new production lines starting from the end-2022. RHB has made a “Buy recommendation for the stock and  has projected the share price to rise to RM2.28

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