V.S. Industry Bhd (VSI) recently held its FY24 post-results briefing, during which analysts revised their earnings forecasts for FY25, FY26, and FY27 downwards by 12%, 19%, and 21%, respectively. This adjustment reflects growing concerns over export and foreign exchange risks, particularly with USD-denominated sales facing pressure amid a slowing growth outlook for key customers. Consequently, the target price has been lowered by 14% to RM1.28 from RM1.49, using an unchanged price-to-earnings ratio of 20.5 times for CY25, which is positioned at +0.5 standard deviations above the five-year mean. Despite these challenges, Maybank Stock Broking House maintain a BUY recommendation for the stock.
In terms of customer performance, VSI noted a quarter-on-quarter increase in orders from Customer X during 4QFY24, contributing significantly to strong sales and margins in the second half of FY24. The company anticipates that volume from this key customer will remain stable as it heads into FY25. Orders from other significant clients, including US-based coffee brewers and pool cleaning manufacturers, are also expected to hold steady, buoyed by the launch of new models. Following the discontinuation of production for Customer Y in March 2024, VSI reported a reduction in losses that positively impacted its bottom line. The company has plans to partially repurpose its facilities to accommodate a new customer by the end of CY24.
Despite the sharp strengthening of the Malaysian Ringgit, which poses a threat to VSI's earnings—given that approximately two-thirds of its sales are denominated in USD—the company remains cautiously optimistic about its future. Analysts estimate that a 10% appreciation of the MYR against the USD could reduce VSI's revenue by approximately 7% to 10% on a full-year basis, leading to potential margin compression. While VSI is currently negotiating to pass on some of the higher foreign exchange costs to customers, there may be a three to six-month period during which these costs will need to be absorbed before price adjustments are reflected, particularly in value-added services.
Looking ahead, VSI's management is hopeful that its ongoing streamlining and expansion efforts will enhance margins and help offset potential challenges related to export earnings and foreign exchange exposure. The company's new operations in the Philippines, along with a prospective customer anticipated to be secured by the end of CY24, are expected to contribute positively from FY26 onwards. As it stands, VSI's share price is currently at RM1.05, with a projected 12-month price target of RM1.28, indicating a potential upside of 24%. With a strong market capitalisation of RM4.1 billion, V.S. Industry remains a prominent player in the electronics manufacturing services sector, ranked as the 26th largest EMS provider globally by revenue.
Source: Maybank
Title: Post-results briefing
