• Maintain NEUTRAL, with new MYR0.81 TP from MYR1.02, 2% downside. VS Industry’s (VSI) 1QFY24 (Jul) results disappointed due to a surprise order cut by a key customer. We believe the current valuation may have priced in the slowdown and we see the company in a good position to capitalise on any potential rebound in volume. On top of that, the further diversification strategy by securing new customers, and brighter macroeconomic outlook would be key catalysts for the stock.

• 1QFY24 results were below expectations. Net profit of MYR49m (-19% YoY) accounted for merely 19-20% of our and consensus forecasts after a material reduction in volume by a key customer. Post-results, we slash FY24F-26F earnings by 4-20% to factor in the lower orders and revised guidance from management. Correspondingly, our TP drops to MYR0.81 (inclusive of a 2% ESG discount), based on 14x 2024F P/E (from 16x). This is close to the stock’s 5-year mean and represents a premium to close peer SKP Resources (SKP MK, NEUTRAL, TP: MYR0.68), warranted by VSI’s more diversified customer base.

• Results review. YoY, 1QFY24 revenue dipped 11% primarily dragged by an unexpected order cut by a key customer whereas most of the other key customers have largely maintained their volumes. This led to a material GPM erosion of 2ppts to 8.4% as production resources have already been committed in anticipation of a pick-up in volume which did not materialise. As a result, 1QFY24 PBT fell 21% to MYR64m. QoQ, 1QFY24 revenue was flattish at MYR1.2bn as opposed to our earlier expectation of a seasonal ramp-up, primarily due to the abovementioned shortfall. Correspondingly, 1QFY24 core net profit shrank 31% to MYR49m.

• Outlook. We understand the order demand of the key customer that cut orders has remained lacklustre and should translate to a sluggish 2QFY24F – consistent with SKP management’s earlier guidance. We believe such weakness could primarily stem from subdued consumer sentiment globally on the back of various macroeconomic challenges. On a positive note, VSI has observed more stable demand with its other key customers which should cushion the downside. Meanwhile, the company is in talks with a potential customer which could be on-boarded in FY24F if everything goes well. Beyond the immediate term, we believe overall demand could gradually recover towards 2HFY24F in view of the potential improvement in the macroeconomic environment and inventory adjustments coming to a tail end.

• Risks to our recommendation include better/worse-than-expected global economy growth and a major supply chain disruption.

Source: RHB Securities Research - 21 Dec 2023