V.S. Industry Bhd
Buy. Target price: RM1.02
CORE net profit of RM62 million (-31% YoY) met only 31-34% of our and consensus’ forecasts on lower-than-expected throughput volumes and the ensuing GPM impact from negative operating leverage. Post results, we cut FY24-26F earnings by 19%, 5%, and 1%.
YoY, 1H FY24 revenue dipped 16% to RM2.1 billion as the order volume from Customer X fell sharply in Q2’24. This also had a significant impact on GPM (1H FY24 GPM: -2.8ppts to 7.2%) considering the vertically integrated production lines for Customer X, and hence, high fixed costs. As a result, 1H FY24 core net profit fell 31% to RM62 million. QoQ, Q2’24 revenue and core net profit were 22% and 73% lower respectively, mainly due to the abovementioned order cut and GPM drag. A second interim DPS of 0.3 sen was declared, bringing 1H FY24 payout to 0.6 sen (1H FY23: 0.8 sen).
Management guided that Customer X’s order volume is gradually recovering, and this should support a quick earnings rebound sequentially. Also, Customer X has new product launches in the pipeline, in which VSI will participate, while the order volumes from its other key customers are growing steadily. The group is also focusing on upgrading its capabilities by offering more services and solutions to its customers. This should bear fruit soon by enhancing its profit margins. We assume FY25F net margin will expand by 1.1ppts YoY to 5.1%. Ongoing discussions with prospective customers are also seeing good progress, and VSI is hopeful of a positive outcome as soon as end-2024. Our forecasts have reflected new order wins of RM100 million and RM400 million in FY24 and FY25F.
Upgrade to BUY from Neutral, with higher RM1.02 TP from RM0.81, 22% upside, 4% FY25F (July) yield.