Introduction

VS Industry Berhad (VSI) is a leading player in the manufacturing sector, specializing in plastic parts, contract manufacturing, precision mould making, and the sub-assembly of electronic and electrical equipment. Operating across Malaysia, China, and Indonesia, the company is strategically positioned to capitalize on transformative opportunities in the years ahead. This comprehensive analysis delves into VSI’s performance, growth outlook, and key insights from the January 3, 2025, report by UOB Kay Hian.

Investment Recommendation

The report maintains a BUY recommendation for VSI with an increased target price of RM1.50, reflecting a potential upside of 28.2% from the current share price of RM1.16. The valuation is based on an 18x FY26F PE, aligned with the company’s five-year forward PE average. This recommendation underscores the company’s strong growth prospects and strategic initiatives for the upcoming years.

Key Highlights

• VSI’s share price recovered 17% since mid-November 2024, presenting an attractive entry point with a valuation of 17.1x FY25F PE, slightly below its five-year mean.
• The company is poised for a stronger 2HFY25 performance and explosive growth in FY26, driven by a transformative business landscape.
• Potential diversification into the medical industry offers new growth avenues and could catalyze a rerating of its consumer electronics (CE)-focused profile.
• VSI’s new subsidiary in the Philippines enhances its regional footprint, with significant revenue contributions expected from newly secured orders.

Performance Overview

The financial year 2024 was eventful for VSI, marked by challenges such as unfavorable headlines about a major customer and forex headwinds. Despite these hurdles, the company strategically leveraged market volatility to present attractive entry opportunities. VSI’s share price rebounded from its mid-November 2024 low, reflecting market confidence in its growth trajectory.

Q1FY25 Performance

VSI’s 1QFY25 core earnings stood at RM32.1 million, a decline of 60% quarter-on-quarter (qoq) and 30% year-on-year (yoy). This was primarily due to inventory destocking by key customers ahead of new product launches and unfavorable forex fluctuations. These challenges, however, are deemed one-off, with stronger quarters anticipated moving forward.

Growth Prospects

Strategic Initiatives

VSI is well-positioned to capitalize on new opportunities in FY25 and FY26, driven by a strategic shift in its major customer’s operational direction. The company’s accreditation with the prestigious CM+ status bolsters its supply chain flexibility and product range, enabling it to cross-sell advanced capabilities across diverse markets.

New Product Lines and Revenue Potential

In Malaysia, VSI has secured two new product lines with an annual revenue potential of RM100 million. Additionally, it is bidding for two additional floor care lines in Malaysia and the Philippines, which could contribute up to RM800 million annually. These opportunities have yet to be included in the earnings forecast, signaling potential upside.

Philippines Expansion

The establishment of VSI’s new subsidiary in the Philippines marks a significant milestone. The group has secured a lease agreement for a 570,000 sq. ft. factory building in Batangas, with expected recurring revenue contributions of RM300 million for FY25 and RM1.2 billion for FY26. On full utilization, the facility could generate RM2 billion in annual revenue.

Foray into the Medical Industry

VSI is in discussions with multinational corporations (MNCs) for potential collaborations, particularly in the medical industry. A possible RM300 million contract, with full contributions in FY26, could enhance earnings by 5%. This diversification aligns with the company’s strategy to broaden its offerings and achieve better margins.

Financial Projections

Key Financial Metrics

Earnings Revisions

FY25 earnings were revised downward by 11% due to lower margins from forex impact and HT Press. However, FY26 earnings forecasts were marginally adjusted upward by 2%, reflecting optimism around new growth drivers.

Environmental, Social, and Governance (ESG) Updates

Environmental

VSI is certified with the ISO 14001:2015 Environmental Management System for assembly services, underscoring its commitment to sustainability.

Social

• The company achieved a 99.8% workforce vaccination rate through its In-House Vaccination Programme in August 2021.
• It is proactively collaborating with migrant worker rights specialists and independent auditors to enhance worker welfare in Malaysia.

Governance

VSI has implemented an Anti-Corruption Framework compliant with Malaysia’s Anti-Corruption Commission Act 2009, highlighting its dedication to ethical business practices.

Conclusion

VS Industry Berhad is on a transformative growth path, leveraging strategic initiatives, new market opportunities, and regional expansion to bolster its performance. With a compelling valuation, strong financial metrics, and a clear focus on ESG principles, VSI presents an attractive investment opportunity. The recommendation to BUY with a target price of RM1.50 reflects confidence in the company’s robust growth outlook and ability to deliver value to shareholders.