Hall’s decision to part ways with VSI was due to lack of common ground between both parties, says HLIB Research

By S BIRRUNTHA / Pic credit: vs-i.com

VS INDUSTRY Bhd’s (VSI) effort to take a thorough check on the labour welfare holistically will be positive for the company as it would enable the company to come clean and rectify any gaps under the long-standing labour issue in the manufacturing sector.

Hong Leong Investment Bank Bhd (HLIB Research) said this is contrary to only focusing on the Labour Recalibration Programme (LRP) suggested by migrant worker rights specialist Andy Hall.

To recap, in December last year, in the middle of a foreign labour fiasco following the termination of one of Malaysia’s contract manufacturers by Dyson, VSI issued a joint statement with Andy Hall to work together in tackling migrant workers’ welfare.

The discussion progressed towards addressing the challenges identified from the LRP.

Following that, it was reported that Hall had withdrawn his voluntary engagement with VSI with immediate effect barely three months into their joint collaboration.

HLIB Research said Hall’s decision to part ways with VSI was due to lack of common ground between both parties.

“Management shared that they have taken the crucial actions required to amend the challenges namely, appointing a credible firm, PwC Consulting to conduct a third-party audit review of VSI’s labour practices; audit review to be based on the 11 International Labour Organisation Indicators of forced labour.

“This includes supplementing the audit methodology by PwC Consulting with independent labour right experts and lawyers and; audit review on the whole scope of VSI employees including local workers, foreign workers and newly absorbed workers under the LRP,” it said in a recent note.

The research house also noted that the management shared that VSI has acquired an approved quota of 3,700 foreign workers pending border reopening.

“Should the government announce to allow the entry of foreign workers this year, we opine that VSI would be able to cater to the robust order growth from its customers.

“The group has spent RM30 million for the new hostel which could house an additional 1,800 workers,” it said.

HLIB Research has reiterated its ‘Buy’ call on VSI, with an unchanged target price (TP) of RM1.78 based on 20 times of calendar year 2022 earnings per share.

The research house added that it likes VSI given the healthy order outlook brought by the steady demand of consumer electronic products; and margin expansion from customer diversification efforts.

“As the biggest electronics manufacturing services player in Malaysia with a solid track record, we opine that VSI is a prime beneficiary from the intensifying trade diversion theme,” it said.

Meanwhile, Public Investment Bank Bhd (PublicInvest Research) expects that management of VSI would have learned from that experience and will do the necessary to ensure it is not exposed to such potential eventualities.

However, the research house opined that it sees significant share price weakness as opportune timing for accumulation.

“Both sides have merits to their arguments — one that appears to be based on broken promises, and the other based on a need to get a “clean bill of health” hence it doing whatever is deemed necessary for its own good.

“Concerns, understandably, are overwhelming seeing as that a peer had its key customer cutting off ties (albeit with a six-month grace period) and causing a significant drop in earnings (and resulting market capitalisation) despite constant assuages that “all was well, and under control”, it said in a recent note.

Commenting further, PublicInvest Research noted that the group’s key clients remain engaged on these matters, to which management has affirmed that these remain as non-issues.

It added that as negative sentiment notwithstanding for the group, the research house continues to like the VSI’s long-term growth prospects and reiterated its ‘Outperform’ call.

However, PublicInvest Research trimmed the group’s TP to RM1.40 from RM1.86 previously, as it cut multiples to 15 times from 20 times previously, in line with its long-term average to also reflect the higher risk premium.

It said this is underpinned by its forward three-year compound annual growth rate of 15%.