KUALA LUMPUR: Integrated electronics manufacturing services (EMS) provider VS Industry Bhd is expected to record sustained weak margins in the second half of its financial year ending July 31, 2022 (FY22) due to labour and component shortages as well higher raw material costs, according to CGS-CIMB Research.

       The research unit said it had lowered its FY22 earnings per share (EPS) forecasts for VS Industry, and remained cautious on the impact of supply chain disruptions on its operations as it has yet to see clear signs of an improvement on this front.

       CGS-CIMB Research has also cut its EPS forecast for VS Industry’s FY23, as it expects component shortages to continue to plague the industry well into the first half of FY23.

       However, CGS-CIMB Research noted that it expects “revenue momentum to remain steady in the upcoming quarters from a ramp-up in production for customer Y as well as for three new models secured in the first quarter of FY22 from customer X.”

       The research unit said it continued to like VS Industry for its diversified customer base as well as undemanding valuations.

       CGS-CIMB Research maintained its “add” call on VS Industry, with a lower target price of RM1.33, still pegging it to 15.7 times 2023 PE (price-earnings), in line with its historical five-year mean PE.

       Meanwhile, Hong Leong Investment Bank (HLIB) Research said VS Industry, as the biggest EMS player in Malaysia with a solid track record, is a prime beneficiary from the intensifying trade diversion theme.

       HLIB Research also cut its FY22 forecast for VS Industry by 17% to account for the margin challenges in the near term.

       The research unit maintained its “buy” call with a lower target price of RM1.45 (from RM1.78) based on 18 times PE (previously 20 times), pegged to 2022 EPS.

       “Following the recent sell down, the stock currently trading at an attractive 10.4 times FY23 estimated PE. We like VS Industry given the healthy order outlook brought by the steady demand of consumer electronic products; and margin expansion from customer diversification efforts,” said HLIB Research.

       In light of labour scarcity, VS Industry is ramping up efforts in hiring local workers to tackle the foreign labour shortage.

       “Should the government announce to allow the entry of foreign workers this year, we opine that VS Industry would be able to cater to the robust order growth from its customers,” said HLIB Research.

       There is also strong outlook from the group’s customer X with order diversion from another contract manufacturer following the recent labour issue.