• Maintain BUY, with new TP of MYR1.33 from MYR1.39, 20% upside and 2% FY25F (Jul) yield. Key takeaways from VS Industry’s 1QFY25 briefing point to a strong earnings recovery in 2HFY25F whilst the explosive growth prospects in FY26F remain largely intact. We continue to like VSI for its market share gain via the Philippines expansion and higher insourced production content to drive margin enhancement. A successful foray into the medical industry will be a major catalyst to drive a re-rating.

• Significant recovery in 2HFY25F. VSI was off to a slow start to FY25 with 1QFY25F core net profit dipping 38% YoY to MYR31m. primarily dragged by unfavourable FX, losses of MYR7m incurred by subsidiary HT Press Work due to the high product rejection rate, and inventory adjustments by its US- based customer in preparation for new product launches. Earnings recovery will be gradual QoQ before staging a sharp rebound in 2HFY25F, driven by new product launches by key customers and better seasonality. Post- briefing, we cut FY25F-27F earnings by 9%, 3% and 2% to factor in the minor delays to expansion plans and revised margin guidance by management. Correspondingly, our TP drops to MYR1.33 (no adjustment to our ESG score of 3.0), based on an unchanged 19x 2025F P/E.

• Positive traction with Customer X. Customer X’s streamlining exercises have been favourable to VSI, by rendering better autonomy in the area of purchasing, thereby complementing VSI’s strategies to beef up internal capabilities. More tangibly, it was awarded two new orders from Customer X worth MYR100m pa, with production scheduled to start by Feb/Mar 2025. In addition, VSI is aiming for MYR800m worth of jobs in the floorcare segment that could materialise by early 2025. With the Philippines operations to start executing the MYR1.2bn worth of orders by Apr 2025, we believe Customer X will be the main force driving FY26F growth of 77%.

• Tough start to the important medical venture. Management updated on a new customer from the medical industry – the stringent requirements to attain various qualifications have stalled progress, with VSI investing MYR3- 4m for this customer so far. To hit the ground running with this venture would be significant for the group to establish its presence in the medical field, which promises better profitability and sticky volumes. By diversifying away from the consumer electronics segment, which commands thin profit margin and volatile demand, this could pave the way for a more stable earnings profile over the longer run.

• Risks to our recommendation include a major delay to expansion plans and significant loss in market share.

Source: RHB Securities Research - 9 Dec 2024