RHB Research in the recent Malaysia Company Update report stated that VS Industry’s first half financial year 2023 (Jul) results were disappointing on worse-than-expected diseconomies of scale and forex losses.
VS Industry Bhd (VSI) (88160-P) is a provider of integrated electronics manufacturing services. It is involved in manufacturing, assembling and marketing electronic and household electrical products, and plastic moulded components and parts.
Notwithstanding management’s expectation of volume bottoming out, RHB Research believes it will require more clarity on the demand outlook before sentiment on the stock can recover.
This is taking into account the material earnings downside risks arising from the heavy fixed cost structure of the electronic manufacturing services business.
Net profit of RM 91 million (+9% year-over-year) met only 36% of RHB Research and street estimates. The negative deviation could be attributed to lower-than-expected margins coming from diseconomies of scale and negative operating leverage.
In addition, the group recorded a forex loss of RM 20 million in quarter two financial year 2023. Post-results, RHB Research cut the financial year 2023 to 2025 future earnings by 7-14% to account for the lower margins.
Transfer price drops marginally to RM 0.84 as RHB Research rolls over the valuation base year to 2023 future from financial year 2023 future, based on an unchanged 13x price-earnings ratio.
The valuation is on par with the one ascribed to peer SKP Resources (SKP MK, NEUTRAL, trading price: RM 1.43). Year-over-year, the first half of financial year 2023 revenue jumped 23% to RM 2.4 billion, driven by increased orders from major customers whilst the first half of financial year 2022 was dragged down by labour and part components shortage.
Thanks to the higher throughput volume, gross processing margin recovered by 0.8 points to 10% and the first half of financial year 2023 net profit rose by 9%.
Quarter-over-quarter, quarter two financial year 2023 revenue dipped 11% to RM 1.1 billion on relatively softer seasonality and toned-down demand.
In quarter two financial year 2023, gross processing margin eroded by 0.9 points to 9.5% as a result of the drop in volume and together with a forex loss of RM 20 million, quarter two financial year 2023 net profit slumped 50% to RM 30 million.
Looking forward, management has guided for quarter three financial year 2023 future earnings to remain subdued in view of the seasonality factor and key customers’ cautious stance on the near-term demand outlook.
Notwithstanding, VSI is not trying to rationalise the fixed costs by downsizing its resources as it believes the volume may be bottoming out and some key customers are lining up new product launches towards the year end which may spur a rebound in volume.
That said, RHB Research believes investors could continue to stay on the sidelines given the uncertainty on the global economic outlook and any potential deterioration of global demand will dent VSI’s profitability significantly given the heavy fixed costs.
Risks to their recommendation include better or worse-than-expected global economic growth and a major supply chain disruption.
