Date: 25 September 2024
Broker: UOB Kay Hian
Company Overview
VS Industry (VSI MK) is a leading provider of electronics manufacturing services, specializing in the manufacturing of plastic parts and components, precision mold making, contract manufacturing, and sub-assembly of electrical and electronic equipment. The company operates in Malaysia, China, and Indonesia, with its largest operations based in Malaysia.
Stock Performance
- Share Price: RM1.11
- Target Price: RM1.42
- Upside: +27.9%
- Market Cap: RM4,259.1 million (US$1,021.4 million)
- 52-week high/low: RM1.33/RM0.720
Major Shareholders
- Employees Provident Fund: 8.3%
- Beh Kim Ling: 7.7%
- Kumpulan Wang Persaraan Diperbadankan: 5.7%
FY24 Financial Performance
VS Industry reported strong results for FY24, with core net profit surpassing expectations. The company posted core net profit of RM80.2 million for 4QFY24, a 47% quarter-on-quarter increase and a 9.8% year-on-year rise. For the full year, VS Industry’s core net profit reached RM209.7 million, exceeding both UOB Kay Hian’s and consensus forecasts by 20% and 21%, respectively.
Sales Performance
- Total FY24 Sales: RM4,248.1 million (-7.6% year-on-year)
- 4QFY24 Sales: RM1,213.3 million (+20.1% quarter-on-quarter, +4.4% year-on-year)
VS Industry saw mixed sales results across its regional markets, with Malaysia contributing the majority of sales, followed by Singapore and Indonesia.
Sales by Region (FY24)
- Malaysia: RM3,024.1 million (-11.1% year-on-year)
- Singapore: RM874.7 million (+8.2% year-on-year)
- Indonesia: RM349.3 million (+2.5% year-on-year)
- China: RM0.0 (operations fully scaled down)
Margin Improvement and Profitability
VS Industry’s gross profit margin for 4QFY24 improved to RM145.6 million (+42.0% quarter-on-quarter, +27.6% year-on-year), largely due to the accretion of its new capabilities for a major customer. Earnings before interest and tax (EBIT) for 4QFY24 reached RM109.3 million (+50.7% quarter-on-quarter, +10.1% year-on-year), marking a positive trend for the company despite the challenging global environment. The company’s net profit for FY24 increased by 33.8% to RM246.1 million.
Trade Diversion Beneficiary
VS Industry continues to be a frontrunner in benefiting from trade diversion as multinational companies shift their manufacturing operations due to geopolitical uncertainties. The company is actively engaged in discussions for prospective contracts, with different stages of evaluation for these opportunities. These new contracts could further enhance its revenue base and drive future growth.
Segmental Performance
VS Industry’s Malaysian operations remain its core business, generating 71.2% of total sales. The company’s Indonesian operations grew by 38.7% in 4QFY24, showing robust performance. The scaling down of operations in China had a minimal impact on overall performance, as the company successfully redirected resources to its other markets.
Operational Highlights
- Malaysia: The Malaysian market remains the largest contributor to VS Industry’s revenue, though the company saw an 11.1% year-on-year decline in sales for FY24. However, profitability was bolstered by new capabilities introduced for its major customer, leading to margin improvement.
- Indonesia: Indonesia saw significant growth in sales, particularly in 4QFY24, with a 38.7% year-on-year increase.
- China: Operations in China were scaled down, contributing to zero revenue in FY24. This strategic move allowed the company to focus on more profitable markets.
Financial Outlook
- FY24 Core Net Profit: RM209.7 million
- EPS (FY24): RM0.04
- PE (FY24): 27.8x
- FY25 Net Cash per Share: RM0.04
- Dividend Yield: 1.8%
VS Industry’s net cash position improved in FY24, and the company is expected to maintain a strong balance sheet with low debt levels.
Valuation and Recommendation
UOB Kay Hian maintains a BUY recommendation on VS Industry with a target price of RM1.42, reflecting a 27.9% upside. The target price is based on the company’s favorable risk-reward profile, particularly given its positioning to benefit from trade diversion and new contract wins. With improving margins and stronger profitability in the coming quarters, VS Industry is expected to remain a key player in the electronics manufacturing services space.
Key Risks
Key risks to VS Industry’s outlook include:
- Global Supply Chain Disruptions: Any significant disruptions in the global supply chain could impact the company’s ability to meet customer demand.
- Competition in the Electronics Manufacturing Sector: Increased competition from other electronics manufacturing service providers could affect pricing and margins.
Conclusion
VS Industry posted stronger-than-expected FY24 results, driven by new capabilities, margin improvements, and growing demand in key markets like Indonesia. The company’s strategic position as a beneficiary of trade diversion further bolsters its growth prospects, with discussions for potential new contracts underway. Despite some challenges in the global market, VS Industry is well-positioned for future growth and remains a compelling investment option.
