We came away from VS Industry's analyst briefing last week with a better picture of the company's outlook. Management has revised its sales growth target higher to 6% while net margin is estimated to be in the range of 4.8% - 5.0%, though subject to foreign exchange (FX) movements and labour costs. The stronger sales growth of RM300m is mainly from its Customer X following the bagging of 2 new models in Malaysia. Meanwhile, the majority of its customers have given positive tones on respective outlooks, led by more new product launches. There is also the possibility of more products being transferred from Mexico to Malaysia by Customer X as they plan to shut down operations there. The strong earnings recovery is only expected to kick in by the second half however. Maintain Trading Buy with an unchanged TP of RM1.18 based on 15x FY26 EPS.

• 1QFY25 results round-up. During the quarter, margins were affected by higher material costs and higher labour costs for Customer X's projects. In addition, the 60%-owned HT Press Production incurred a loss of RM7m. Management has already stopped deliveries for this particular production facility and is currently in the final stage of reviewing the operation as the structure of the business is complicated for e-cigarettes, leading to a high rejection rate. The sales were lower on a YoY basis as its US-based customer was undergoing inventory rationalisation, resulting in a slowdown in production until the end of this month. Meanwhile, the coffee brewer customer also experienced a seasonally weak quarter.
• Order book breakdown. Management has set a revenue growth target of 6% for FY25, mainly led by contributions from Coffee Brewer (15.5%), Pool Cleaning (9.0%), US-based customer (15.5%), and Customer X (41.0%). It is also worth noting that the sales target excludes contribution from the newly established plant in the Philippines, which is delayed to April for commercial operation. The initial expected FY25 sales contribution from the Philippine operation is about RM300m. Meanwhile, all the notable clients have given a positive outlook with stronger sales orders from the US-based and Coffee Brewer customers in 2HFY25 while the pool cleaning customer is expected to see seasonally strong performance in 2Q-3QFY25. The improved order book from Customer X includes 2 new fan models with an expected annual sales contribution of RM100m.
• Other highlights. The Philippine operation is expected to incur some start-up costs, which will see some losses in the 4Q. Currently, it has secured 2 product models, and is in the midst of bidding for a floorcare product worth RM400m. All-in, management expects sales contribution of RM800m-1.6bn from the new plant. It also shared that there is 1 potential medical-related customer, who has delayed the sales order pending FDA approval, and could potentially see a significant contribution once it enters mass production. The medical orders are more stable in nature and fetch higher margins. Lastly, VS has been accredited with a new status called contract manufacturer plus (CM+) from Customer X, in which it will be able to undertake a wider range of products and more autonomy from the client on what type of materials to purchase.

Source: PublicInvest Research - 9 Dec 2024