PETALING JAYA – VS Industry Bhd’s (VSI) margins are likely to continue facing challenges, especially from increased labour and utility costs.

Hong Leong Investment Bank (HLIB) Research said the group’s underutilised facility and cooling demand for consumer electronic products could also have an impact on margins.

“We foresee that customers will remain cautious in placing orders with the soft macro outlook and high interest rate environment. The tough economic environment continues to put a strain on operational expenditures with increase in labour, utilities and financing costs.

“Management continues to adopt prudence in ensuring a lean and efficient operating landscape to mitigate the increased costs.”

For the second quarter ended Jan 31, 2024, the company registered a net profit of RM16mil, which was slightly over half the net profit of RM30.36mil in the year-ago quarter. Consequently, its earnings per share fell to 0.42 sen from 0.79 sen previously.The group reported revenue of RM895.02mil, down from RM1.15bil in the previous corresponding quarter.

For the six-month period ended Jan 31, 2024, VSI’s net profit dropped to RM64.99mil from RM91.07mil in the previous corresponding period, while revenue stood at RM2.05bil, compared with RM2.4bil a year earlier.

HLIB Research is trimming its financial year 2024 (FY24) and FY25 forecast down 42% and down 6% respectively, adjusting for lower sales and margin challenges in the near term.

Meanwhile, RHB Investment Bank said that the worst could be over for VSI.

“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 which VSI will participate in. The order volumes from its other key customers are growing steadily.”

The research house added that VSI is 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 FY25 net margin will expand by 1.1 percentage points year-on-year 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.”

Meanwhile, CIMB Securities said VSI is entering an earnings upcycle with core net profit growth of 34.2% and 24.5% in FY25 and FY26 respectively.

The research house said this would be backed by recovery in sales orders, introduction of new product models, acquisition of new customers and margin accretions from enhancements in value chain.

“VSI’s significant operational scale and on-going efforts in vertical integration positions it well to benefit from opportunities arising from the prevailing China+1 trend.

“VSI’s share price is supported by FY25 to FY26 dividend yields of 2.3% and 2.8%, respectively, backed by its strong balance sheet (0.07 times net gearing and RM699mil in cash balances as at end of the second quarter of FY24).”

CIMB Securities, however, said potential downside risks include continued sluggishness in the global consumer electronics market and potential reduction in or redirecting of orders from its key clients to other contract manufacturers in other regions.

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