by NURUL SUHAIDI / pic source vs-i.com
AMINVESTMENT Bank Bhd has maintained a ‘Buy’ recommendation on VS Industry Bhd due to the optimistic longer-term outlook for the electronic manufacturing services (EMS) provider.
The bank however revised VS Industry valuation lower to RM1.27 per share fair value from RM1.61 per share previously.
It also lowered VS Industry’s financial year 2022 (FY22) gross profit margin assumption by 1.5% points, in view of rising raw material and labour costs further exacerbated by the newly imposed minimum wage of RM1,500 effective May 1, 2022.
“This cut our earnings forecast for VS Industry by 22% to RM187.5 million,” the investment bank stated in a report yesterday.
AmInvestment Bank however maintained VS Industry earnings forecast for FY23–FY24 on the assumption VS Industry will be able to pass on higher labour costs in six months, as happened after the most recent minimum wage rise in 2020.
VS Industry’s core earnings of RM76 million in the first half of 2022 (1H22) which excluded net foreign exchange gain, was below expectations, contributing for only 32% of the bank’s FY22 prediction and 28% of consensus.
The fall was owing to reduced orders for printed circuit board assembly from key clients as well as ongoing component supply difficulties in Malaysia.
VS Industry core profit margin during the period fell to 3.8% in 1H22 from 6.8% in 1H21 due to higher raw material or labour costs and depreciation charges together with sub-optimal production levels for a key new customer. Operational inefficiencies deteriorated further due to supply shortages.
Based on quarter-to-quarter growth, VS Industry’s second-quarter 2022 profit before tax increased by 7.5% in the absence of one-off set-up costs for the industrial vaccination centre and employee vaccinations.
Excluding these costs, VS Industry’s core profit remained flattish. VS Industry acknowledges remaining challenges in the EMS industry brought about by the Covid-19 pandemic and geopolitical uncertainties.
The disruption in the global supply chain has led to longer lead times and component shortages, driving up raw materials costs.
VS Industry remains optimistic and is in active discussions with key customers on potential new orders.
AmInvestment Bank remains positive on VS Industry’s longer-term outlook, underpinned by its ability to offer turnkey EMS solutions as a vertically integrated player.
VS Industry is also improving its overseas operations supported by higher sales orders from its Indonesian segment as well as better cost rationalisation initiatives in China.
Not only that, VS Industry is committed to better environmental, social and corporate governance standards, particularly on improving employees’ welfare.