Mainly due to forex, V.S. Industry's 1QFY25 core earnings (-17% YoY) missed expectations. We expect margins to normalise in the coming quarter, due to its cost pass through mechanism with customers. The underlying business is strong, underpinned by its strengthening relationship with Customer X, as the group recently secured the CM+ status and was awarded new models. With the expansion to Philippines on track, this provides a healthy pipeline of growth until FY26F. Retain BUY at RM1.45.

• BUY at unchanged target price of RM1.45. This is based on an unchanged target PE of 17x and CY26 EPS.
• Missed expectations due to forex. VSI's 1QFY25 core earnings fell 17% YoY to RM33mil. This missed expectations, forming 13% of consensus estimates. Unsurprisingly, the miss was due to forex, following the sharp strengthening of the ringgit during the quarter. While the group does have a cost past through mechanism in place with customers, there is typically an up to two quarter time lag. With the USD stabilising, we expect to see 2QFY25 margins normalise.
• Strengthening relationship with Customer X:
  1. Awarded CM+ status. This is for contract manufacturers with vertical integration capabilities. Moving forward, the group will have more autonomy in managing its supply chain (vs. nominated suppliers in the past), which can lead to future cost savings.
  2. Secured two new models and bidding for more. Totaling revenues of RM100mil per year, the group has secured two new environmental care lines, which is targeted to start production in 1QCY25. At its Indonesia facility, it will also now be providing after sales services for Customer X. On top of this, the group is bidding for two floor care lines (one in Malaysia and one in Philippines), which can contribute revenues of RM400mil per year per line, if secured. We keep our estimates unchanged for the moment, as it is within our assumption of future sales growth.
  3. Progress in Philippines. Mass production is expected to commence by 2QCY25. Currently the factory is undergoing renovation, which will subsequently be followed by a test run and qualification process. Capex allocated for the factory is RM100mil.
• New medical customer delayed. While the group was expected to announce a new medical customer by December 2024, this will unfortunately be delayed. More strategic, if it fruitions, this will mark the group's diversification into new segments outside of consumer electronics. We estimate every new customer secured, increases FY26F earnings by +4%.

Source: AmInvest Research - 9 Dec 2024