• Maintain BUY and MYR1.39 TP, 35% upside and c.3% FY25F (Jul) yield. Investor feedback from our recently hosted non-deal roadshow (NDR, meeting nine institutional clients) for VS Industry was largely positive, buoyed by favourable changes in business dynamics interpreted by management and the latest job wins. We believe stock selldown is unwarranted as FX impact on earnings is one-off in nature and should not alter our investment thesis ie market share gain and beefing up internal supply chain to drive medium-term growth prospects.

• New regime, new dynamics. Management believes the change of guard at Customer X will be favourable to VSI in the longer run. Key changes so far after the streamlining and restructuring exercise include: i) Greater delegation of work to tier-one contract manufacturers (CMs) in the scope of sourcing, ESG audits and R&D. This will render more autonomy to the CMs and complement VSI’s strategy to internalise the supply chain; ii) broadening the addressable markets by offering an affordable range of products, which could translate to higher order volume; iii) lifting of restrictions for VSI to manufacture a certain category of products in Malaysia – this is a major positive development as VSI’s insourcing initiatives for will work more effectively on certain products to enhance profit margin.

• Promising order outlook. Essentially, VSI’s near-term earnings growth outlook will be primarily fuelled by its new expansion in the Philippines with MYR1.2bn worth of orders in hand and the expectation of another contract by end-2024F. Meanwhile, it is not all quiet in Malaysia, to our surprise, as VSI has received new orders from Customer X. Although the contract values are not overly significant, the higher internalised content and product mix may make up for VSI’s earnings materiality. Together with the reopened opportunity following the abovementioned lifting of restrictions, which signifies an improving relationship, order prospects in Malaysia could get more exciting.

• Weaker USD not a structural headwind. The steep QoQ depreciation of the USD is expected to negatively impact VSI’s 1QFY25F earnings by requiring material FX adjustment. That said, the impact is one-off in nature (barring further sharp FX movement) given the repricing mechanisms are in place to pass on savings/costs periodically to customers on a cost-plus basis. We make no changes to our earnings ahead of the 1QFY25F results and fullydiluted TP of MYR1.39, which implies 19x 2025F P/E, or at +2SD over the stock’s 5-year mean (including a 2% ESG discount). Refer to Page 3 for other key takeaways from the NDR.

• Risks to our recommendations include a major delay in expansion plans and significant loss of market shares.

Source: RHB Securities Research - 4 Nov 2024