• Stay BUY, new MYR1.38 TP from MYR1.02, 20% upside and c.3% FY25F (Jul) yield. VS Industry’s 9MFY24 results beat expectations on stronger- than-expected margins recovery. We believe the share price rally still has legs, given solid earnings delivery, margins upside potential, and positive news flows to sustain the bullish sentiment on the stock. Our forecasted 3- year earnings CAGR of 19% will be underpinned by orders recovery, margins enhancement, and potential new job wins.

• 9MFY24 results deemed above expectations. Core earnings of MYR117m (-1% YoY) accounted for 71-73% of our and consensus’ forecasts, but we are anticipating a seasonally stronger 4QFY24. Post results, we raise FY24F-26F earnings by 5-9%. Correspondingly, our TP rises to MYR1.38 (inclusive of a 2% ESG discount) based on a higher P/E multiple of 19x from 16x to reflect the promising prospects. The valuation is at +2SD over the stock’s 5-year mean, and represents a premium over peer SKP Resources (SKP MK, BUY, TP: MYR1.31), warranted by VSI’s larger market capitalisation and more diversified customer base.

• Results review. YoY, 9MFY24 revenue fell 11% to MYR3.1bn as orders from Customer X dipped on the back of soft global demand. Correspondingly, 9MFY24 GPM slipped 1.2ppts to 8.2% on lower utilisation rates. Notwithstanding, a MYR55m YoY swing in FX adjustments more than offset the impact of lower throughput volumes, and 9MFY24 core PBT stayed flat YoY at MYR150m. QoQ, 3QFY24 jumped 13% to MYR1bn, as volumes rebounded from the low base following a gradual normalisation of orders by Customer X and steady growth of other key customers. Together with a more favourable product mix, 3QFY24 GPM recovered strongly by 4.5ppts to 10.1%. As a result, 3QFY24 core net profit surged >3x to MYR54m.

• Outlook. The earnings recovery momentum should accelerate in the next two quarters on stronger seasonality, in our view. Additionally, we gather that orders from Customer X have continued to improve and VSI has participated in new job tenders (results expected to be known by end 2024). Meanwhile, the development of new capabilities are progressing well, with commercial production partially commencing in April. This should lead to more margins enhancement moving forward when the production moves into full swing and more capabilities start contributing upon reaching optimal efficiency. On the other hand, discussions with prospective customers are ongoing and VSI is hopeful of positive outcomes as soon as end 2024. Our forecasts have pencilled in new order wins of MYR300m pa in FY25-26.

• Risks to our recommendation include a major slowdown in the global economy and significant loss of market share.

Source: RHB Research - 20 Jun 2024