RHB Investment Bank (RHB), in its latest report on V.S. Industry Berhad released today maintained a BUY recommendation with a revised target price of RM1.49, indicating a potential upside of 17% from the current market price of RM1.27 (USD1,037m market cap).
RHB said the investment thesis underscores VS Industry's robust growth trajectory, driven by its strategic expansion into the Philippines and enhanced customer diversification efforts.
The recent analyst visit to Electronic Manufacturing Service (EMS) companies in Johor provided positive insights into near-term sector earnings prospects, particularly highlighting VSI 's substantial market share gains and its proactive approach in customer diversification.
The company's impressive 3-year earnings compound annual growth rate (CAGR) of 28% is expected to be bolstered by its new capabilities development and opportunities arising from trade war diversions.
During the visit, the analyst at the House observed firsthand VSI 's new capabilities in Liquid Silicone Rubber (LSR) and dipping processes, integral to its product offerings.
These advancements are set to increase internalised parts and processes, thereby improving profit margins and operational flexibility for competitive tendering. Notably, new job tenders with key customer insights are anticipated to materialise by August or September 2024.
Further discussions shed light on VSI's strategic foray into the Philippines, aimed at bolstering market share with existing clients and leveraging its operational expertise to mitigate execution risks.
The initial phase of this venture will adopt an asset-light model, minimising fixed costs and requiring sales thresholds of RM300 million to achieve breakeven.
An equity-raising exercise of up to RM534 million has been initiated to fund capital expenditures and working capital needs estimated at RM400–500 million.
The research house projects a muted earnings impact in FY25F due to start-up losses in 3QFY25F, which are expected to be offset by maiden earnings in 4QFY25F from the Philippines operations.
The forecasted earnings for FY26F have been raised by 18%, incorporating RM900 million in sales contributions from the Philippines. This optimistic outlook supports the revised target price of RM1.49, based on an unchanged 19x 2025F price-to-earnings ratio and including a 2% ESG discount.
RHB maintains its bullish stance on VSI, underpinned by the company's strategic expansions, robust earnings growth prospects, and favourable market dynamics.
The target price reflects a premium valuation justified by VS Industry's market leadership and promising growth avenues compared to its peers in the EMS sector.
Investors are encouraged to consider VS Industry for its potential capital appreciation and sustained earnings growth in the evolving manufacturing landscape, RHB said.