Investment Highlights

• We maintain HOLD on V.S. Industry (VSI) with a lower fair value (FV) of RM0.73/share (vs. RM0.90/share previously) resulting from a downward revision in the group’s earnings. Our FV is based on an unchanged CY24F target PE of 15x (Exhibit 2), at parity to the group’s 5-year average. We make no adjustment to our neutral 3- star ESG rating.

• VSI’s 1QFY24 core earnings of RM49mil were below expectations, accounting for only 20% of our forecast and street’s.

• The deviation was primarily due to weak orders from VSI’s key customers. Consumer sentiment is soft due to the high interest rate environment. In comparison, 1Q accounted for 25%-28% of revenues in FY18-23. In 1QFY24, 1Q accounted for a smaller 23% of VSI’s revenue.

• Hence, we cut VSI’s FY24F-26F core earnings by 24%/19%/11% to reflect the lower demand. We have also trimmed our profit margin assumptions for FY24F-25F from 4.7%-4.9% to 4%-4.5% due to lower economies of scale.

• VSI has declared an interim dividend of 0.3 sen/share in 1QFY24, which implies a payout of 24%. In tandem with the lower core earnings forecasts, we have reduced VSI’s gross DPS to 1.9/2.2/2.6 sen from 2.5/2.8/2.9 sen for FY24F26F.

• On a YoY basis, VSI’s 1QFY24 revenue declined by 11% to RM1.2bil dragged by a fall in orders from key customers in Malaysia and Indonesia. High interest rates had affected consumer spending.

• 1QFY24 core earnings contracted by 17% YoY to RM49mil. Apart from weaker demand, VSI was also affected by a lower economies of scale, which caused a 2ppt decline in gross profit margin (GPM) to 8.4%.

• On a QoQ basis, VSI’s 1QFY24 revenue was flat but core earnings declined by 33% to RM49mil. Gross profit margin eased by 2ppt in 1QFY24 due to a change in product mix.

• Going forward, we expect VSI’s earnings to continue to be weak as demand from key customers remains sluggish.

• The stock currently trades at an expensive CY24F PE of 20x, 33% above its 5-year average of 15x.

Source: AmInvest Research - 21 Dec 2023